Business India, September 15 – 28, 2003
E-com on the rails
A subsidiary of the railways serves up reservations on the Net
Shivanand Kanavi
Have you heard of Aluva, Allapuzha, Haldwani, Kollam, Palakkad, or Thrissur? Even if you had, definitely not as hot beds of ecommerce. Well, the data that Amitabh Pandey, GM (IT services) at IRCTC (Indian Railways Catering and Tourism Corporation) dishes out from his desktop would teach a thing or two to many Internet gurus.
IRCTC has been providing online ticketing for Indian Railways for the last year. In this short time it has come to be the largest e-commerce site in India, booking over 50,000 tickets per month. Some might say that Railways sell over 500,000 tickets a day, and hence this is “just peanuts”. Sure it is.But what’s important is the trend. The convenience of booking a ticket online using a credit card without standing in any queue, and then having the tickets delivered home by courier, is drawing people by the droves into it.
“It’s not just the metros which have been active but as soon as we add a new town on our system, they start getting active with hardly any advertisement,” adds Pandey. “You can see from the July 2003 data that clearly Mumbai (11,107), Delhi (7,504), Chennai (6,141), and Bangalore (4,430) lead. But a fairly large number of bookings are coming from Anand, Allahabad, Baroda, Bhopal, Bhubaneswar, Coimbatore, Dehradun, Faridabad, Ghaziabad, Guwahati, Indore, Jaipur, Jabalpur, Kanpur, Kochi, Kozhikode, Ludhiana, Nagpur, Patna, Rajkot, Silvassa, Surat, Vapi, Varanasi, and Visakhapatnam as well,” he adds.
Pandey has become an evangelist for e-commerce. “Despite the fact that Internet spread is very limited, it is spreading very fast. I just came from Kumaon last week — in a tahsil town like Ranikhet there is Internet access. The telecom revolution has come to India. I remember when I was in Jhansi the only reliable telephone was the railway’s telephone at the station. Today I see my parents in their 1970s chatting on AOL. In fact a majority of users of online booking are above 30, breaking another myth that Internet commerce is basically a youth phenomenon.
The middle class is conscious of the Internet and its possibilities. It may be small compared to the volumes in India, but it has come to stay and is growing very fast. The opportunities are immense.
This is not rocket science; the idea has been around for a long time even in the Railways. After IRCTC was set up to mainly improve catering and hospitality associated with Railways, we went to the Railways and said this too could be done quickly by us. The ministry was totally with us. It took us only one presentation to convince the board. It was a simple presentation and the board asked us some questions. We assured them that the existing passenger reservation system would not be disturbed and they said, go ahead.”
With his enthusiasm for technology one would think Pandey is a techie. But he is not. A product of the Delhi School of Economics, Pandey taught in Delhi University colleges for a few years before joining Railway Traffic Services in 1982. Traffic services involve operations (train planning, running, traffic planning, etc), associated commercial activities, and safety monitoring.
Pandey’s 15 years in operations took him to Bombay,Nagpur, Bhusawal, Jhansi, etc. Then the Railways started to corporatise catering and set up IRCTC, which started operations in 2001.
Historically, the Indian Railways have played a major role in popularising computers in India. Reservations were computerised in the 1980s by CMC and immediately brought relief to consumers in terms of efficiency and time saved. The Railways set up the Centre of Railway Information Systems (CRIS) in 1986 to be an umbrella for all computer activities of Indian
Railways so that different divisions did not carry on incompatible IT activities. They also entrusted it with the task of design, development, and implementation of the Freight Operations Information Systems, along with its associated communications infrastructure.
CRIS improved the reservation system and also networked it so that any one could book any ticket from any terminal in India and improved the system further. This service, enjoyed by millions, contributed greatly to changing the image of computers as job-stealers into enhancers of productivity.
Of the 11 million passengers who travel in 8,520 trains each day, about 550,000 have reserved accommodations. The challenge is to provide a reservation system that can support such a huge scale of operations — regardless of whether it’s measured by kilometers, passenger numbers, routing complexity, or simply the sheer scale of India. The Passenger Reservation System (PRS) started in 1985 as a pilot project in New Delhi. It has distributed databases at Mumbai, Delhi, Kolkata, Chennai, and Secunderabad. These five centres are networked with leased lines and different towns are connected in turn to one of these centres. It is a robust system, selling nearly 200 million tickets a year, and no one wants to disturb it even if its technology is obviously two decades old. That is the reason the IRCTC team went to great lengths to assure the Railway Board that they would not touch the existing system in any way. IRCTC would need just an entry point into PRS, where the queries coming from its Internet customers would be converted into an appropriate form understandable to PRS. The Railways treated IRCTC as any other ticket window, hence IRCTC had to pay them in advance and collect the money later from its customers through credit card payments.
“Though we have secure servers, people are still hesitant to give credit card information on the net. Hence we are increasingly connecting it to the payment gateways of banks providing Net banking so that the money can be deducted from their bank accounts directly,” says Pandey. The number of banks joining in this direct debit is increasing by the day — ICICI Bank, HDFC Bank, IDBI Bank, Citibank, Bank of Punjab, Global Trust Bank, UTI Bank, and Centurion Bank are already on board. The recent addition of State Bank of India is expected to increase the reach of this system.
“Direct debit transactions have increased greatly after we hooked up with IRCTC,” says C.N. Ram, IT head at HDFC Bank. But Pandey continues to innovate. “We are looking at bookings on the phone through call centres as well as through mobile commerce, where service providers take up the collection risk.” The volumes of online booking are still small. In the last year they have amounted to only Rs57 crore, but as the number cities and towns serviced by IRCTC increases and as payment options increase, the volumes are also bound to rise. Why should towns be added to an Internet booking service? After all, the Net is accessible from anywhere in the globe. Well, the limitation comes from the courier service since the tickets can be booked from anywhere but the delivery is still physical. Of course, one way to sort this out is to take the e-ticket route, where the ticket is sent by email to the customers as many airlines do in the US.
Pandey and his team are of course ironing out any wrinkles in the system for example a common complaint from customers in Mumbai is that when a customer books a return ticket, inexplicably he gets a ticket terminating at Kalyan or Borivli, which are outlying stations. The reason is that Mumbai is not one station. Several fall in the area: Kalyan, Kurla, Dadar (Central), Dadar (Western), Borivli, Bandra, and Mumbai Central. When the customer does not give the right station code understood by PRS, the system assumes the outermost station in the cluster and goes ahead. “This is in fact the challenge in our system. PRS is an interactive system, which is operated by trained railway personnel the way airline reservations are done by travel agents, whereas Internet bookings are done by customers who are not accustomed to codes, etc, and need a self-help portal. We are working constantly to improve it,” says Pandey.
Clearly the “death of distance” vision of the dot.com era had substance which got buried in the hype. Now with greater Internet and PC penetration, along with improved telecom infrastructure, some glimpses of that future are here.
Tuesday, August 14, 2007
Rajeev Motwani
Business India, May 24-June 6, 2004
Mathematician at heart
Rajeev Motwani is eagerly waiting for the Google IPO
Shivanand Kanavi
Rajeev Motwani has done it all. A Godel Prize winner, one of the most prestigious awards in theoretical computer science, one of the youngest professors at Stanford. Author of several papers in esoteric subjects like randomised algorithms and data streaming, Motwani is now eagerly waiting. No, not about another award or a theoretical conference, but for the Google I P O. As a former technical advisor to Google and a mentor to the founders in their student days at Stanford, where the search engine took shape, Motwani owns an undisclosed amount of stock in Google.
Motwani’s father was in the Indian Army, which meant growing up all over India. Young Motwani wanted to be a mathematician, like Gauss. “This was partly shaped by the books I had at home. My parents for some reason had a lot of these books – 10 great scientists or five famous mathematicians – their life story and so on. As a child, whatever heroes you read about you want to become,” adds he.
After St. Columbus in Delhi, Motwani joined I I T Kanpur, which at that time had just started the undergraduate programme in computer science. “I truly wanted to be a mathematician, and my parents were hesitant because how do you make money as a mathematician, how do you support a family, what is this all a b o u t .
“I was basically forced into going into computer science even though I did not want to, but it turned out to my wonderful surprise that computer science is actually quite mathematical as a field. One of the shaping influences was actually Kesav Nori – he was there for a while and, in fact, I I T Kanpur at that time had a outstanding computer science department. It was an amazing confluence of people and p e r s o n a l i t i e s .
“Again Berkeley was a very positive influence, very politically oriented; it’s like the J N U of the US. I was so thoroughly enjoying the new environment I was in. My advisor, Richard Karp, was a Turing Award winner, which is sort of like the Nobel Prize in computer science. At that point it occurred to me that I am letting down this great man, not producing anything and the last two years I was tremendously productive.”
Motwani has worked in many different areas in Stanford, like robotics and drug design. “I credit Stanford for creating an environment where people in different areas can work with each other and do things where the whole is greater than the sum of the parts,” he says.
“Meanwhile the World Wide Web was coming around at that time and I just got sucked into that. Sergey Brin and Larry Page were running a search engine out of Stanford. These 21- year-olds would come in and make demands on me – we need more disk space because we are crawling the Web and its getting bigger, we need to buy more disk... I’d give them more money and they’d go buy more disks. At some point these guys said, we want to go do a company. Everybody said you must be out of your minds. There are like 37 search engines out there and what are you guys going to do? And how are you going to raise money, how will you build a company, and these two guys said, we’ll just do it and they went off and did it. And there are some big names who supported the company in its early stages. And then they took over the world. And right now, you know, other search engines do not even compare. It is just amazing. Just feels like a part of a little bit of history and I contributed a little bit to that history. Now I have become a start-up
j u n k i e . ”
How does Google’s technology work? He explains, “Let us say that you wanted information on ‘bread yeast’ and put those two words in Google. Then it not only sees which documents have these as words mentioned but also whether these documents are linked to other documents. An important page for ‘bread yeast’ must be having all other pages on the Web dealing in any way with ‘bread yeast’ also linking to it. In our example there may be a Bakers’ Association of America, which is hyper-linked by most documents containing ‘bread yeast’, then it implies that most people involved with ‘bread’ and ‘yeast’ think that the Bakers Association’s Web site is an important source of information. So Google will rate that Web site very high and put it on top of its list. Irrelevant documents which just mention ‘bread’ and ‘yeast’ will not be given any priority in the results.
“By the way, you might have noticed that the job of the search engine is nothing more than what a humble Librarian does all the time and more intelligently! However, the automation in the software comes to our rescue in coping with the exponential rise in information.”
Rajeev Motwani is eagerly waiting for the Google IPO
Shivanand Kanavi
Rajeev Motwani has done it all. A Godel Prize winner, one of the most prestigious awards in theoretical computer science, one of the youngest professors at Stanford. Author of several papers in esoteric subjects like randomised algorithms and data streaming, Motwani is now eagerly waiting. No, not about another award or a theoretical conference, but for the Google I P O. As a former technical advisor to Google and a mentor to the founders in their student days at Stanford, where the search engine took shape, Motwani owns an undisclosed amount of stock in Google.
Motwani’s father was in the Indian Army, which meant growing up all over India. Young Motwani wanted to be a mathematician, like Gauss. “This was partly shaped by the books I had at home. My parents for some reason had a lot of these books – 10 great scientists or five famous mathematicians – their life story and so on. As a child, whatever heroes you read about you want to become,” adds he.
After St. Columbus in Delhi, Motwani joined I I T Kanpur, which at that time had just started the undergraduate programme in computer science. “I truly wanted to be a mathematician, and my parents were hesitant because how do you make money as a mathematician, how do you support a family, what is this all a b o u t .
“I was basically forced into going into computer science even though I did not want to, but it turned out to my wonderful surprise that computer science is actually quite mathematical as a field. One of the shaping influences was actually Kesav Nori – he was there for a while and, in fact, I I T Kanpur at that time had a outstanding computer science department. It was an amazing confluence of people and p e r s o n a l i t i e s .
“Again Berkeley was a very positive influence, very politically oriented; it’s like the J N U of the US. I was so thoroughly enjoying the new environment I was in. My advisor, Richard Karp, was a Turing Award winner, which is sort of like the Nobel Prize in computer science. At that point it occurred to me that I am letting down this great man, not producing anything and the last two years I was tremendously productive.”
Motwani has worked in many different areas in Stanford, like robotics and drug design. “I credit Stanford for creating an environment where people in different areas can work with each other and do things where the whole is greater than the sum of the parts,” he says.
“Meanwhile the World Wide Web was coming around at that time and I just got sucked into that. Sergey Brin and Larry Page were running a search engine out of Stanford. These 21- year-olds would come in and make demands on me – we need more disk space because we are crawling the Web and its getting bigger, we need to buy more disk... I’d give them more money and they’d go buy more disks. At some point these guys said, we want to go do a company. Everybody said you must be out of your minds. There are like 37 search engines out there and what are you guys going to do? And how are you going to raise money, how will you build a company, and these two guys said, we’ll just do it and they went off and did it. And there are some big names who supported the company in its early stages. And then they took over the world. And right now, you know, other search engines do not even compare. It is just amazing. Just feels like a part of a little bit of history and I contributed a little bit to that history. Now I have become a start-up
j u n k i e . ”
How does Google’s technology work? He explains, “Let us say that you wanted information on ‘bread yeast’ and put those two words in Google. Then it not only sees which documents have these as words mentioned but also whether these documents are linked to other documents. An important page for ‘bread yeast’ must be having all other pages on the Web dealing in any way with ‘bread yeast’ also linking to it. In our example there may be a Bakers’ Association of America, which is hyper-linked by most documents containing ‘bread yeast’, then it implies that most people involved with ‘bread’ and ‘yeast’ think that the Bakers Association’s Web site is an important source of information. So Google will rate that Web site very high and put it on top of its list. Irrelevant documents which just mention ‘bread’ and ‘yeast’ will not be given any priority in the results.
“By the way, you might have noticed that the job of the search engine is nothing more than what a humble Librarian does all the time and more intelligently! However, the automation in the software comes to our rescue in coping with the exponential rise in information.”
Monday, August 13, 2007
The Essar Story
Business India, July 26-August 8, 1999
Tempering Essar
A group that became one of the icons os entrepreneurship in the early 1990s has suffered a setback. Will it learn from its mistakes and fight its way out of the corner?
Shivanand Kanavi
It is a great view from the top of Essar House, an ornate structure bordering on the opulent. The Ruias manage their conglomerate, the Essar Group, encompassing steel, power, oil, telecommunications, and shipping, from their offices on the 19th and 20th storeys. From the glass-and-marble tower you have a bird’s eye view of the famous Royal Western India Turf Club, commonly known as Mahalaxmi Race Course, where fortunes are sometimes made but most often lost. Turning left, you see businessmen and executives sharpening their swings and putts with their irons on the golf course at Willingdon Club. Straight ahead is the panoramic expanse of the Arabian Sea and, if the weather's good, a clear horizon. Today, however, the monsoon has made the seas choppy. In the midst of their packed schedules with international bankers, as the Ruias cast glances at the turbulent waters, they must find the sight rather symbolic.
They have had many firsts in several businesses, of which they are proud of, but today they don't relish the new first: they became the first Indian corporate group to have defaulted on a foreign financial obligation by failing to redeem their floating rate notes (FRNS) worth $250 million on 20 July 1999.
What has gone wrong?
What will they do next? Are they going under? Will they survive this setback and bounce back? Do they have a credible plan for the same? These are several questions that Business India investigated. To put things in perspective and not be carried away by the down cycles in commodities, the more appropriate question to start with is: What did they do right?
If there was any proof needed that liberalisation would unleash true entrepreneurship in India, then Essar's growth in the last 10 years could be cited as one of the handful of examples. From successful medium-sized businesses in marine and port construction, oil-drilling, and shipping, Essar first took the opportunity provided by the gas pipeline to start a very successful sponge iron business and then, with the gradual opening up of the steel sector, had the vision to set up a world-class integrated steel plant.
For Indians used to outdated steel technology in public sector mills, and the old works at Jamshedpur, Essar provided the first glimpse of world-class steel manufacturing, setting up a mill that produces two million tonnes of steel and hot-rolled coils with less than 2,000 employees. When many thought that India could be competitive because of cheap labour, Essar thought otherwise. Today its labour costs (according to Paribas Asia Equity) are $5 per tonne as compared to $49 per tonne for SAIL and $ 76 per tonne for Tisco, and its energy costs per tonne are half that of SAIL and Tisco.
Since an assured and cheap power supply is essential, they first went in for a 215 MW captive power plant and then, when the opportunity arose for independent power producers, expanded it to 515 MW. This power plant is run by a total of 38 people.
It is well known that Bailadila in Orissa produces the best iron ore in the world. However, lumps of iron ore are exported, while the fines or tailings mount up into ugly mountains at the rate of 8-9 million tonnes per year. In the monsoons a large part of these fines actually flow into the rivers, polluting the water. So Essar came up with a plan to convert them into pellets that can be fed directly into sponge iron plants as feedstock. Until now the South Americans had a monopoly over this product (DR-grade pellets). So Essar set up a modern pellet plant at Visakhapatnam (run by 75 people, including administration) producing 3.5 Mtpy of pellets. Since rail transport of fines costs about Rs400 per tonne, it planned a beneficiation plant that would upgrade the fines, and a slurry pipeline that would reduce the cost of transportation to Rsl00 per tonne. Essar designed it to carry 7 million tonnes, giving themselves enough scope to double capacity whenever required.
Essar had already built up expertise in shipping and port construction, thus building the required infrastructure at Hazira and Vizag was no problem. In fact, it actually gave them the flexibility to use pellets internally as well as export pellets from Vizag and steel or sponge iron from Hazira.
Similarly, when the government allowed the private sector to exploit developed minor oilfields and explore new ones, Essar, by then one of the largest drilling contractors in the Gulf, was quick to bid. When government took great time to carryon in this direction but opened up oil refining, Essar was one of the first out with a proposal to build a refinery. Since then, even though dozens of proposals were submitted by various industrial houses and public sector oil companies, the only ones under implementation are Reliance Petroleum (27 Mtpy) and Essar Oil (10.5 Mtpy with a provision to reach 24 Mtpy later). Reliance has announced the commissioning of its refinery, while Essar's is in an advanced stage awaiting commissioning in the second half of next year.
Restructuring a reputation
While financially restructuring the conglomerate, the Essar group is faced with an even more difficult task of changing public perception about itself. The problems with refinancing its floating rate notes (FRNS) leading to default have been accompanied by a large number of negative reporting in the media, which Essar claims is based on fiction rather than the facts. As a result, while Shashi and Ravi Ruia are talking to bankers, young Prashant Ruia is taking time off from hectic debottlenecking activities in the steel plant at Hazira. Important improvements are being made in manufacturing technology at Hazira which might soon take Essar Steel into the elite top tenth percentile of lowest-cost steel producers in the world. After all, with his costs down, if signs of another upcycle in steel prove to be true he might just start making some 24-carat gold at Hazira rather than "24carat steel" as the ad campaign says.
But today Prashant is courting the fourth estate. He has already met senior editorial teams of several newspapers and magazines and is telling others that he can meet them any time on their turf. The format of these meetings has varied from formal presentations and Q&A to free for all "court-martial". Prashant is not expecting remarkable immediate benefits from this communication exercise, but acknowledges that, if he had done enough of this earlier, maybe the media's perception would have been different by now. Nevertheless, armed with tons of documents, and his informal, amiable nature, he is chugging on. Clearly, he's hoping that, like the commodity cycles that he speaks so much about, there is also a cycle of a non-commodity called public perception.
However, Prashant Ruia also claims that negative public perception is not only a result of bad communication but also downright disinformation. One such example, he points out, is a forged document being circulated in media circles as 'Highlights of Heads of Financial institutions Meeting held in Delhi on 24 June'. Among other things the 'document' says, "The heads of financial institutions unanimously decided that the Ruias should be replaced from the management of the following companies at the earliest to ensure viability of any attempt to revive these companies: Essar Steel, Essar Oil, Essar Mineral, and Essar Telecom." When Business India tried to verify the authenticity of this document, we were told by a spokesman of IDBI, “Please be advised that the purported copy of the minutes of HIM (officialese for heads-of-institutions meeting) is not true and does not reflect the discussion held at the HIM."
In this atmosphere, some common allegations the Ruias are trying to refute are:
•’’Essar has diverted funds from publicly listed companies into family-owned ones. For example, from steel, oil, shipping, and power into telecom”
Essar Steel, Essar Power, Essar Shipping, and Essar Oil have not invested in Essar's telecom business as inter-corporate deposits, as secured or unsecured debt, or as equity. Ruias are ready to provide certificates from the elite top six audit firms, some of which have been vetting every financial move in Essar group as a part of implementing a code of corporate governance.
• "By floating a family owned entity 'Prime Hazira' and taking a minority stake in Essar Power, the family will make money in the current sale of Essar Power to Marathon”
Prime Hazira was set up as a special purpose vehicle in Mauritius to channel international funds into an independent power project. Accordingly, UBS lent it $75 million, which was used to bring equity into Essar Power. Prime Hazira's entry was with the knowledge and approval of the FIS and an undertaking that any future profit made by Prime Hazira by selling its stake would flow back to Essar Steel. JM Morgan stanley and Donaldson, Luffkins &: Jernette (DLJ) have structured the deal with Marathon for the 100 per cent sale of Essar Power. They were mandated to not only consult the lenders while maximising value for existing shareholders, but also make sure that the sale of Prime Hazira's holding was not to the detriment of Essar Steel and Essar Oil.
• "Funds from listed companies were diverted for the building of Essar House as a family property”
Essar House was built with family funds from the sale of real estate owned by the family in Maker Towers, Nariman Point, and elsewhere, and borrowings from HDFC. No funds from any of the listed companies were utilised in any manner for the same. Even now the listed companies pay rents and deposits to Essar House based on rates fixed by an independent real estate valuer.
• "Cost overruns and project padding are used by Ruias to siphon funds from projects”
Essar's capex per tonne of manufacturing capacity created in steel, oil, and power (per MW) are among the lowest not only in India but in the rest of Asia as well (see tables). These comparative figures are available in project appraisals done by financial institutions and other documents as well.
• "The FRNs have been bought by the Ruias at a discount and they are waiting for the FIs to refinance the notes so that they can make money”
According to a letter written by Chase Securities Inc on 18 June 1999, "to our knowledge, neither the Ruia family nor other affiliates of Essar own any material amount of the notes."
• "The Ruia family's international holdings are a mystery"
These are transparent and strategic investments. Acquiring the holding in ILVA Italy (one of the largest integrated steel producers in Europe) was financed by Essar Global, a family-owned company, with the full knowledge of the Government of India. Actually, Essar Steel wanted to pick up the stake in ILVA but RBI rules did not permit the same. The required money was raised as acquisition financing by Essar Global and repaid after partial divestment in favour of the Riva family. "The investment has bought considerable technological support for Essar Steel during its start-up phase (nearly 50 ILVA personnel were at Hazira), as a result of which we were able to achieve quality and ramp up capacity very fast. Now it provides a good source of understanding of the European steel market." With regard to P.T. Essar Dhananjaya in Indonesia, the promoters are Essar Steel, Essar Global, and the local Dhananjaya group. This cold-rolling unit is a major importer of Essar Steel's hotrolled coils and has done well even during the Southeast Asian crisis. Essar Global has also invested $23 million in the AfroAsian Satellite project - the first by the Indian private sector - promoted by Subhash Chandra.
The fact that such questions are being asked of this group are testimony to one of its weaknesses - the lack of an aggressive communication policy that is both reactive and proactive, a must for all modern corporations. But it is to be admitted that we as a nation are not known for objectivity. One day we hail them - "They can do no wrong" - and the next we condemn them - "They can do no right". Reliance, another business group which has risen fast, periodically suffers the same plunges in public perception. We can appropriately name this the "Azharuddin syndrome" after our cricket captain, who must know this phenomenon better than anybody else.
Jamnagar was the natural choice for both Essar and Reliance, because the Gulf of Kutch allows for all-season import of crude and is the shortest distance away from wells in the Middle East. Not only that - since refinery products are in great demand in north and central India and since a product pipeline already exists between Kandla and Bhatinda, a small extension from Vadinar to Kandla can evacuate the products to the north, while a central Indian pipeline is being planned by Petronet from J amnagar to Itarsi and Gwalior. Essar's own project engineers, who number about 800, are playing an important role in building, debottlenecking, and detail-engineering many of their projects.
When the government liberalised shipping, Essar expanded furiously and is today the second largest in terms of capacity (38 vessels, 1.42 million tonnes dwt). It owns six of the most modern double-hull, doublebottomed Suezmax tankers, which operate in international waters. It also owns several bulk carriers which operate in both Indian and international waters. The fleet is the youngest in India, with an average age of seven years. A majority of the vessels are employed on long- and medium-term time charters, enabling stability of revenue generation even during the shipping down cycle. Essar Shipping has negotiated a $97-million loan from GE capital corporation (GECC), USA, one of the largest and with the longest maturity periods ever raised in the Indian shipping industry. In fact, the second tranche of the loan was disbursed recently after Essar Steel defaulted on its FRNS, testifying to the soundness of its shipping business. Essar makes a considerable amount of money by buying ships when the prices are low and selling them when they are in demand following standard international practices.
Get connected
When the government opened up telecommunication Essar, like 23 other business groups in India, saw a great opportunity and bid for various circles. With an astute plan it acquired the licences for basic services in Punjab and cellular services in Delhi, Punjab, Haryana, Rajasthan, and eastern UP through vendor and acquisition financing. "Big vendors like Nokia, Motorola, Ericsson, Siemens, and others have built huge capacities to supply telecom equipment and are facing a downturn in their business, so besides investment bankers, vendors too are aggressively funding acquisitions. The idea is that one pledges the shares to these companies and either borrows from them or gives them a certain equity stake with a clause to buy back later with a certain mark-up. Then, once the service is rolled out and a subscriber base built up, that is value is built into the business, one sells the whole or part of one's equity and repays the loans," explains Ravi Ruia. In effect, the licence-holder puts in very little of his own money.
This has become a standard method of funding telecom projects the world over. In fact, the entire telecom financing in China has been done this way. Though Essar faced problems in paying its licence fees to DoT recently, the new telecom policy has encouraged several banks and institutions to come forward with funds now. "The key fact is that we own cellular licences to most of north India and, with appropriate strategic alliances in Gujarat and Mumbai, we can harness the long-distance traffic between Delhi and Mumbai, where the cream of STD traffic lies," says Hemanth Luthra, CEO of Essar Telecom. Now that Swisscom, its foreign partner, wants to exit from its Asian businesses and focus on the new action in European telecoms, and Shivasankaran, the other minority partner, also wants an exit, Essar is seriously engaged in raising funds for acquiring the remaining 49 per cent in Sterling Cellular. It is also keen on bringing in a new strategic partner.
If it is such a rah-rah story, then what went wrong? The Jamnagar refinery is literally lying in pieces at various points on a massive 15-sq km plot, making for a truly tragic sight. Over Rs5,000 crore worth of equipment has already been purchased and Rs4,219 crore been paid to suppliers and contractors. But 15,000 labourers who were working day and night to finish the work have been sent home since March 1999. Many ABB Lummus crest engineers who had the responsibility to execute the project within the stipulated time and budget have gone home on a "short vacation". The damage and delay caused by the cyclone to the refinery's seawater intake and tank farm were being set right after filing for insurance claims, but all that is at a standstill. The reason for this paralysis: institutions are not disbursing sanctioned loans worth about Rs800 crore, ostensibly because Essar has not brought in Rs585 crore as additional equity through the Euro Convertible Bond route. For that, however, the present market conditions are entirely to blame.
Meanwhile, the Ruias are diluting their equity in the refinery project through fresh infusion of equity by a strategic partner. In the process they will reduce their own holdings to 26 per cent from the present 44 per cent, the partner will hold another 26 per cent, and the public the rest - the pattern adopted by MRPL. In this regard two oil companies - BPCL and Oman Oil- are carrying on simultaneous due diligence of the project, which is an attractive potential strategic acquisition for both - the former is short of refining capacity and the latter, an oil producer, is looking for capacity. The process, however, will take several months. Meanwhile ABB Lummus crest is putting in Rs200 crore as subordinate debt (treated as quasiequity) to keep the work going. But will the FIS now relent and release the already sanctioned loans and stop this colossal waste? It has been reported that MRPL is in a similar bind and has been unable to bring in Rs671 crore as equity because of the adverse market conditions. However, in its case, the FIS have been "sympathetic" and offered to take up Rs400 crore as equity while MRPL brings in another Rs271 crore thraugh internal accruals. When Business India asked ICICI whether this report was true and, if it was, why the discrimination, we received no reply. Similar was the official response from lOBI. Asked about the FRNS, everybody was either" too busy or travelling".
Whose money is it anyway? If the institutions have come to the conclusion that the Ruias are incompetent, they should remove them from management and take over the project instead of paralysing it. The point is not that the Essar Group has not made mistakes, but that it is well on the way to restructuring its finances with the full knowledge of its bankers and institutional lenders. The group is not asking for a "bailout" either, but simply disbursal of sanctioned loans to complete the project while the restructuring is on. Everybody who is trying to buy or sell a small house knows that it cannot be done in a jiffy, leave alone deals involving assets worth thousands of crores of rupees.
The Essar Group is selling its power plant to Marathon of the US, however painful it may be to part with a moneyspinner. The sale will reduce its debt exposure by Rs1,550 crore and return Rs 130 crore worth of unsecured loans to Essar Steel. The sale of equity will bring in $ 71.4 million into Essar Steel's and $15.3 million into Essar Oil's reserves.
It has spun off its pelletisation plant in Vizag as a separate company Essar Minerals on the advice of institutions. The FIS have assessed its Vizag assets at Rs1,OOO crore - about Rs400 crore in equity and Rs600 crare in debt. Stemcor, a large international trading house, wants to acquire 51 per cent of the equity in Essar Minerals. Essar Steel is diluting its holding by issuing fresh equity worth Rs180 crore to Stemcor, thereby giving it about 30 per cent. This fresh equity infusion will go into the completion of the pipeline and beneficiation project. Whatever stock Stemcor buys from Essar Steel later to gain a majority within the Rs580-crore total equity will go to Essar Steel. This divestment will also lead to the transfer of Rs500 crore in debt from Essar Steel to Essar Minerals.
By acquiring a majority stake in Essar Minerals, Stem cor will get an assured source of DR-grade pellets for supply to China, Southeast Asia, Iran, Qatar, etc. "The slurry pipeline has already been bought. The beneficiation plant has also been bought and both are lying in Vizag. Stemcor's money will help us complete it.
We have decided that we are not going to invest any more in the project. Whatever more money is required to complete the pipeline and later build the second plant will be brought in by Stemcor,” says Prashant Ruia. “However, as in the sale of Essar power, we have made sure that Essar Steel will get an assured supply, in this case of DR-grade pellets,“ adds Ravi Ruia. The total equity of the project as it stands will be about Rs600 crore and debt Rs900 crore. The additional Rs300 odd-crore in debt will be arranged by Stemcor. Trading houses Internationally are acquiring assets like this for assured supplied. Instead of doing spot trading they want long-term supplied, which helps them moderate the cyclicals. Similarly, another trading house called Deferco has bought steel mills in Russia and the US, and is emerging as a large investor.
Riding out of death valley
These two moves themselves will remove over Rs2,l 00 crore in debt from Essar Steel's books, since Rs1,550 crore is being taken over by Marathon and Rs600 crore transferred to Essar Minerals, in which Essar Steel will have a minority stake. This will reduce the debt-equity ratio from the current 2:1 to 1.34:1. It should be noted that the debt-equity ratios for two other major steel projects - Ispat and Jindal- stand at 3.51:1 and 2.88:1 respectively. Already Essar's cost of production is $230 per tonne and hectic efforts are on at Hazira to reduce this by another $ 7-10 using hot sponge iron for steel, a pioneering effort in many ways. Phase II of debottlenecking is in progress to increase the capacity of the plant to 2.4 Mt with no new investments. In short, Essar Steel will be raring to go in the expected upcycle in steel. A 22 June report by World Steel Dynamics Inc predicts that the international steel market has crossed the "death valley" of $185-240 a tonne - the lowest in the last 20 years. In fact, Essar has already started booking orders at $250-260 a tonne for exports," says]. Mehra, managing director of Essar Steel. "It is clear that commodities need branding as well, and that is why we are on a major marketing and market development campaign to highlight the quality of our product, for which people are ready to pay a premium,” says Prashant Ruia.
The default by Essar Steel on the redemption of its FRNs worth $250 million also has an interesting backgroungd. The FRNS were raised in the international market in 1994 with a maturity period o five years. The event itself was a first for an Indian company. The steel sector internationally has access to long-term loans extending anywhere from 12-15 years. However, at that time, such long-term mony was not available for Indian steel compnies. Today, steel manufacturers can raise money which will mature after 12 years. Since this debt was part of the project as appraised by financial institutions and not outside of it, Essar Steel assumed that the FIS would refinance it to meet the new 12-year norm. Meanwhile, not willing to rely on them, since the PIS were already heavily exposed to the group (though within their prudential norms), Essar tried to raise the money to refinance the FRNS in the international market more than a year before redemption. In fact, lead manager Lehman Brothers Securities Asia Ltd had prepared a prospectus for an issue of $200 million notes due AD 2008 and $200 million notes due AD 2018 in early 1998. However, Pokhran-II buried all hopes for the issue. Since the finance minister had promised in Parliament that no Indian company would suffer as a result of the sanctions, and so on, Essar assumed that Indian banks and financial institutions would now refinance the FRNS and that too on merit and not as a favour. However, these hopes were belied when they advised them to seek a roll-over from the noteholders. Rollover is a euphemism for default. Essar hoped against hope till the last moment and finally wrote a letter to all the noteholders through Chase Securities, trustee to the issue. "The company is currently examining the possibility of refinancing the notes or seeking an extension of the maturity of the notes. The company intends to present a comprehensive plan within 90 days of the scheduled redemption date. The company proposes to pay the interest due on the FRNS shortly," the letter said.
"They are not Real Value (remember the Vacumizer?). After all, how many business groups in India have built up assets of about Rs15,000 crore in the last 10 or even 20 years?" asks R. Sankaran, chairman of IndGlobal Trust, the only banker who was willing to go on record, which points to the prevailing atmosphere. "They have my sympathy. They started the project when there was 140 per cent duty protection on imports of steel and interest rates were 17-18 percent. By the time they came up with the project, duties were down to 25-30 per cent. Under these circumstances, how do you put up global capacities and be competitive?" Warming up to the subject, Sankaran says, "As far as the fRNS are concerned, the issue is very simple. IDBI and other institutions should be asked what they were doing all this time. SBI had also said it would finance it. Where are they? Everybody knew that the notes were coming to maturity. Six months back they were quoted at a 40 per cent discount. The institutions could have saved the country $100 million by buying the notes from the market at that time and extinguishing them, and then asking Essar to pay up the $250-million loan.
A top SBI official acknowledged, "The rolling-over of the FRNS is viewed as a technical default in India. But in the international markets it is done quite often even by reputed corporates and MNCS. There is nothing wrong with the Essar Group. It miscalculated its strategy and the current imbroglio is the price it had had to pay. But the group still has steam left in it and is restructuring its businesses. Indian banks and DFIS will not increase their support to Essar because they have reached their lending limits and because it has become a politically sensitive issue. But I am sure Essar will raise the money from some bank overseas." A large number of people we met in the financial community expressed similar views and were similarly averse to going on record.
The attitude, however understandable, cannot be justified. After all, a banker is a trustee of public money. Other than matters that govern fiduciary confidentiality, his opinion on an important corporate issue, whether it is favourable to the company or not, is a matter of public interest. Remember, it is these very gentlemen who, in endless streams of appraisal notes, assure their boards that, in the present globalising economy, these mega projects are not only viable but, indeed, desirable. Of course, if a promoter, however well intentioned, has proved to be incompetent, the bankers who have put public money into the company have every right to remove him from management control and bring in their own team, which is the international practice.
"In the last 15 days I have learnt what I couldn't have in 15 years," says young Prashant Ruia. The major mistake Essar made is that, while launching its global-sized projects in steel and oil, it did not fully comprehend the ramifications of the term 'financial closure'. But that is all in hindsight. After all, till Enron made the term popular, how many of us knew it or how many companies understood it? Today, of course, it is as sacred as "motherhood" in Essar House. "By nature I am loath to borrowing money. After nearly 20 years as a successful entrepreneur I raised my first loan for the sponge iron plant," says Shashi Ruia. Who knows, after the shock of default wears off, he might still come up with some surprises and remove this blemish.
Today, looking out of his office at Essar House towards Mahalaxmi race course, he hasn't the stomach for further financial gambles of any sort. "Financial closure first," he says. A bit uncharacteristic for a man who became a legend for his risk-taking in Indian ports from Kakinada to Tuticorin, from Goa to Mangalore and Chennai to Mumbai, and succeeding when he was barely in his 20s. But that is what tempering is all about - it means moderation and steeling. He could retire, handing the business over to the younger ones, and take to golf at Willing don and improve his present handicap. But he will have none of it - his eyes are set on the choppy Arabian Sea and, like a true shipper, he assures you that the rough seas will pass. He would rather engage in an animated discussion about the latest telecom technologies than wallow in the memories of the good old days in the docks. With that kind of determination, it should surprise nobody if the tempered Ruias bounce back in the not-too-distant future. After all another group, Reliance, went through similar rough seas in the 1980s and fought their way back.
Tempering Essar
A group that became one of the icons os entrepreneurship in the early 1990s has suffered a setback. Will it learn from its mistakes and fight its way out of the corner?
Shivanand Kanavi
It is a great view from the top of Essar House, an ornate structure bordering on the opulent. The Ruias manage their conglomerate, the Essar Group, encompassing steel, power, oil, telecommunications, and shipping, from their offices on the 19th and 20th storeys. From the glass-and-marble tower you have a bird’s eye view of the famous Royal Western India Turf Club, commonly known as Mahalaxmi Race Course, where fortunes are sometimes made but most often lost. Turning left, you see businessmen and executives sharpening their swings and putts with their irons on the golf course at Willingdon Club. Straight ahead is the panoramic expanse of the Arabian Sea and, if the weather's good, a clear horizon. Today, however, the monsoon has made the seas choppy. In the midst of their packed schedules with international bankers, as the Ruias cast glances at the turbulent waters, they must find the sight rather symbolic.
They have had many firsts in several businesses, of which they are proud of, but today they don't relish the new first: they became the first Indian corporate group to have defaulted on a foreign financial obligation by failing to redeem their floating rate notes (FRNS) worth $250 million on 20 July 1999.
What has gone wrong?
What will they do next? Are they going under? Will they survive this setback and bounce back? Do they have a credible plan for the same? These are several questions that Business India investigated. To put things in perspective and not be carried away by the down cycles in commodities, the more appropriate question to start with is: What did they do right?
If there was any proof needed that liberalisation would unleash true entrepreneurship in India, then Essar's growth in the last 10 years could be cited as one of the handful of examples. From successful medium-sized businesses in marine and port construction, oil-drilling, and shipping, Essar first took the opportunity provided by the gas pipeline to start a very successful sponge iron business and then, with the gradual opening up of the steel sector, had the vision to set up a world-class integrated steel plant.
For Indians used to outdated steel technology in public sector mills, and the old works at Jamshedpur, Essar provided the first glimpse of world-class steel manufacturing, setting up a mill that produces two million tonnes of steel and hot-rolled coils with less than 2,000 employees. When many thought that India could be competitive because of cheap labour, Essar thought otherwise. Today its labour costs (according to Paribas Asia Equity) are $5 per tonne as compared to $49 per tonne for SAIL and $ 76 per tonne for Tisco, and its energy costs per tonne are half that of SAIL and Tisco.
Since an assured and cheap power supply is essential, they first went in for a 215 MW captive power plant and then, when the opportunity arose for independent power producers, expanded it to 515 MW. This power plant is run by a total of 38 people.
It is well known that Bailadila in Orissa produces the best iron ore in the world. However, lumps of iron ore are exported, while the fines or tailings mount up into ugly mountains at the rate of 8-9 million tonnes per year. In the monsoons a large part of these fines actually flow into the rivers, polluting the water. So Essar came up with a plan to convert them into pellets that can be fed directly into sponge iron plants as feedstock. Until now the South Americans had a monopoly over this product (DR-grade pellets). So Essar set up a modern pellet plant at Visakhapatnam (run by 75 people, including administration) producing 3.5 Mtpy of pellets. Since rail transport of fines costs about Rs400 per tonne, it planned a beneficiation plant that would upgrade the fines, and a slurry pipeline that would reduce the cost of transportation to Rsl00 per tonne. Essar designed it to carry 7 million tonnes, giving themselves enough scope to double capacity whenever required.
Essar had already built up expertise in shipping and port construction, thus building the required infrastructure at Hazira and Vizag was no problem. In fact, it actually gave them the flexibility to use pellets internally as well as export pellets from Vizag and steel or sponge iron from Hazira.
Similarly, when the government allowed the private sector to exploit developed minor oilfields and explore new ones, Essar, by then one of the largest drilling contractors in the Gulf, was quick to bid. When government took great time to carryon in this direction but opened up oil refining, Essar was one of the first out with a proposal to build a refinery. Since then, even though dozens of proposals were submitted by various industrial houses and public sector oil companies, the only ones under implementation are Reliance Petroleum (27 Mtpy) and Essar Oil (10.5 Mtpy with a provision to reach 24 Mtpy later). Reliance has announced the commissioning of its refinery, while Essar's is in an advanced stage awaiting commissioning in the second half of next year.
Restructuring a reputation
While financially restructuring the conglomerate, the Essar group is faced with an even more difficult task of changing public perception about itself. The problems with refinancing its floating rate notes (FRNS) leading to default have been accompanied by a large number of negative reporting in the media, which Essar claims is based on fiction rather than the facts. As a result, while Shashi and Ravi Ruia are talking to bankers, young Prashant Ruia is taking time off from hectic debottlenecking activities in the steel plant at Hazira. Important improvements are being made in manufacturing technology at Hazira which might soon take Essar Steel into the elite top tenth percentile of lowest-cost steel producers in the world. After all, with his costs down, if signs of another upcycle in steel prove to be true he might just start making some 24-carat gold at Hazira rather than "24carat steel" as the ad campaign says.
But today Prashant is courting the fourth estate. He has already met senior editorial teams of several newspapers and magazines and is telling others that he can meet them any time on their turf. The format of these meetings has varied from formal presentations and Q&A to free for all "court-martial". Prashant is not expecting remarkable immediate benefits from this communication exercise, but acknowledges that, if he had done enough of this earlier, maybe the media's perception would have been different by now. Nevertheless, armed with tons of documents, and his informal, amiable nature, he is chugging on. Clearly, he's hoping that, like the commodity cycles that he speaks so much about, there is also a cycle of a non-commodity called public perception.
However, Prashant Ruia also claims that negative public perception is not only a result of bad communication but also downright disinformation. One such example, he points out, is a forged document being circulated in media circles as 'Highlights of Heads of Financial institutions Meeting held in Delhi on 24 June'. Among other things the 'document' says, "The heads of financial institutions unanimously decided that the Ruias should be replaced from the management of the following companies at the earliest to ensure viability of any attempt to revive these companies: Essar Steel, Essar Oil, Essar Mineral, and Essar Telecom." When Business India tried to verify the authenticity of this document, we were told by a spokesman of IDBI, “Please be advised that the purported copy of the minutes of HIM (officialese for heads-of-institutions meeting) is not true and does not reflect the discussion held at the HIM."
In this atmosphere, some common allegations the Ruias are trying to refute are:
•’’Essar has diverted funds from publicly listed companies into family-owned ones. For example, from steel, oil, shipping, and power into telecom”
Essar Steel, Essar Power, Essar Shipping, and Essar Oil have not invested in Essar's telecom business as inter-corporate deposits, as secured or unsecured debt, or as equity. Ruias are ready to provide certificates from the elite top six audit firms, some of which have been vetting every financial move in Essar group as a part of implementing a code of corporate governance.
• "By floating a family owned entity 'Prime Hazira' and taking a minority stake in Essar Power, the family will make money in the current sale of Essar Power to Marathon”
Prime Hazira was set up as a special purpose vehicle in Mauritius to channel international funds into an independent power project. Accordingly, UBS lent it $75 million, which was used to bring equity into Essar Power. Prime Hazira's entry was with the knowledge and approval of the FIS and an undertaking that any future profit made by Prime Hazira by selling its stake would flow back to Essar Steel. JM Morgan stanley and Donaldson, Luffkins &: Jernette (DLJ) have structured the deal with Marathon for the 100 per cent sale of Essar Power. They were mandated to not only consult the lenders while maximising value for existing shareholders, but also make sure that the sale of Prime Hazira's holding was not to the detriment of Essar Steel and Essar Oil.
• "Funds from listed companies were diverted for the building of Essar House as a family property”
Essar House was built with family funds from the sale of real estate owned by the family in Maker Towers, Nariman Point, and elsewhere, and borrowings from HDFC. No funds from any of the listed companies were utilised in any manner for the same. Even now the listed companies pay rents and deposits to Essar House based on rates fixed by an independent real estate valuer.
• "Cost overruns and project padding are used by Ruias to siphon funds from projects”
Essar's capex per tonne of manufacturing capacity created in steel, oil, and power (per MW) are among the lowest not only in India but in the rest of Asia as well (see tables). These comparative figures are available in project appraisals done by financial institutions and other documents as well.
• "The FRNs have been bought by the Ruias at a discount and they are waiting for the FIs to refinance the notes so that they can make money”
According to a letter written by Chase Securities Inc on 18 June 1999, "to our knowledge, neither the Ruia family nor other affiliates of Essar own any material amount of the notes."
• "The Ruia family's international holdings are a mystery"
These are transparent and strategic investments. Acquiring the holding in ILVA Italy (one of the largest integrated steel producers in Europe) was financed by Essar Global, a family-owned company, with the full knowledge of the Government of India. Actually, Essar Steel wanted to pick up the stake in ILVA but RBI rules did not permit the same. The required money was raised as acquisition financing by Essar Global and repaid after partial divestment in favour of the Riva family. "The investment has bought considerable technological support for Essar Steel during its start-up phase (nearly 50 ILVA personnel were at Hazira), as a result of which we were able to achieve quality and ramp up capacity very fast. Now it provides a good source of understanding of the European steel market." With regard to P.T. Essar Dhananjaya in Indonesia, the promoters are Essar Steel, Essar Global, and the local Dhananjaya group. This cold-rolling unit is a major importer of Essar Steel's hotrolled coils and has done well even during the Southeast Asian crisis. Essar Global has also invested $23 million in the AfroAsian Satellite project - the first by the Indian private sector - promoted by Subhash Chandra.
The fact that such questions are being asked of this group are testimony to one of its weaknesses - the lack of an aggressive communication policy that is both reactive and proactive, a must for all modern corporations. But it is to be admitted that we as a nation are not known for objectivity. One day we hail them - "They can do no wrong" - and the next we condemn them - "They can do no right". Reliance, another business group which has risen fast, periodically suffers the same plunges in public perception. We can appropriately name this the "Azharuddin syndrome" after our cricket captain, who must know this phenomenon better than anybody else.
Jamnagar was the natural choice for both Essar and Reliance, because the Gulf of Kutch allows for all-season import of crude and is the shortest distance away from wells in the Middle East. Not only that - since refinery products are in great demand in north and central India and since a product pipeline already exists between Kandla and Bhatinda, a small extension from Vadinar to Kandla can evacuate the products to the north, while a central Indian pipeline is being planned by Petronet from J amnagar to Itarsi and Gwalior. Essar's own project engineers, who number about 800, are playing an important role in building, debottlenecking, and detail-engineering many of their projects.
When the government liberalised shipping, Essar expanded furiously and is today the second largest in terms of capacity (38 vessels, 1.42 million tonnes dwt). It owns six of the most modern double-hull, doublebottomed Suezmax tankers, which operate in international waters. It also owns several bulk carriers which operate in both Indian and international waters. The fleet is the youngest in India, with an average age of seven years. A majority of the vessels are employed on long- and medium-term time charters, enabling stability of revenue generation even during the shipping down cycle. Essar Shipping has negotiated a $97-million loan from GE capital corporation (GECC), USA, one of the largest and with the longest maturity periods ever raised in the Indian shipping industry. In fact, the second tranche of the loan was disbursed recently after Essar Steel defaulted on its FRNS, testifying to the soundness of its shipping business. Essar makes a considerable amount of money by buying ships when the prices are low and selling them when they are in demand following standard international practices.
Get connected
When the government opened up telecommunication Essar, like 23 other business groups in India, saw a great opportunity and bid for various circles. With an astute plan it acquired the licences for basic services in Punjab and cellular services in Delhi, Punjab, Haryana, Rajasthan, and eastern UP through vendor and acquisition financing. "Big vendors like Nokia, Motorola, Ericsson, Siemens, and others have built huge capacities to supply telecom equipment and are facing a downturn in their business, so besides investment bankers, vendors too are aggressively funding acquisitions. The idea is that one pledges the shares to these companies and either borrows from them or gives them a certain equity stake with a clause to buy back later with a certain mark-up. Then, once the service is rolled out and a subscriber base built up, that is value is built into the business, one sells the whole or part of one's equity and repays the loans," explains Ravi Ruia. In effect, the licence-holder puts in very little of his own money.
This has become a standard method of funding telecom projects the world over. In fact, the entire telecom financing in China has been done this way. Though Essar faced problems in paying its licence fees to DoT recently, the new telecom policy has encouraged several banks and institutions to come forward with funds now. "The key fact is that we own cellular licences to most of north India and, with appropriate strategic alliances in Gujarat and Mumbai, we can harness the long-distance traffic between Delhi and Mumbai, where the cream of STD traffic lies," says Hemanth Luthra, CEO of Essar Telecom. Now that Swisscom, its foreign partner, wants to exit from its Asian businesses and focus on the new action in European telecoms, and Shivasankaran, the other minority partner, also wants an exit, Essar is seriously engaged in raising funds for acquiring the remaining 49 per cent in Sterling Cellular. It is also keen on bringing in a new strategic partner.
If it is such a rah-rah story, then what went wrong? The Jamnagar refinery is literally lying in pieces at various points on a massive 15-sq km plot, making for a truly tragic sight. Over Rs5,000 crore worth of equipment has already been purchased and Rs4,219 crore been paid to suppliers and contractors. But 15,000 labourers who were working day and night to finish the work have been sent home since March 1999. Many ABB Lummus crest engineers who had the responsibility to execute the project within the stipulated time and budget have gone home on a "short vacation". The damage and delay caused by the cyclone to the refinery's seawater intake and tank farm were being set right after filing for insurance claims, but all that is at a standstill. The reason for this paralysis: institutions are not disbursing sanctioned loans worth about Rs800 crore, ostensibly because Essar has not brought in Rs585 crore as additional equity through the Euro Convertible Bond route. For that, however, the present market conditions are entirely to blame.
Meanwhile, the Ruias are diluting their equity in the refinery project through fresh infusion of equity by a strategic partner. In the process they will reduce their own holdings to 26 per cent from the present 44 per cent, the partner will hold another 26 per cent, and the public the rest - the pattern adopted by MRPL. In this regard two oil companies - BPCL and Oman Oil- are carrying on simultaneous due diligence of the project, which is an attractive potential strategic acquisition for both - the former is short of refining capacity and the latter, an oil producer, is looking for capacity. The process, however, will take several months. Meanwhile ABB Lummus crest is putting in Rs200 crore as subordinate debt (treated as quasiequity) to keep the work going. But will the FIS now relent and release the already sanctioned loans and stop this colossal waste? It has been reported that MRPL is in a similar bind and has been unable to bring in Rs671 crore as equity because of the adverse market conditions. However, in its case, the FIS have been "sympathetic" and offered to take up Rs400 crore as equity while MRPL brings in another Rs271 crore thraugh internal accruals. When Business India asked ICICI whether this report was true and, if it was, why the discrimination, we received no reply. Similar was the official response from lOBI. Asked about the FRNS, everybody was either" too busy or travelling".
Whose money is it anyway? If the institutions have come to the conclusion that the Ruias are incompetent, they should remove them from management and take over the project instead of paralysing it. The point is not that the Essar Group has not made mistakes, but that it is well on the way to restructuring its finances with the full knowledge of its bankers and institutional lenders. The group is not asking for a "bailout" either, but simply disbursal of sanctioned loans to complete the project while the restructuring is on. Everybody who is trying to buy or sell a small house knows that it cannot be done in a jiffy, leave alone deals involving assets worth thousands of crores of rupees.
The Essar Group is selling its power plant to Marathon of the US, however painful it may be to part with a moneyspinner. The sale will reduce its debt exposure by Rs1,550 crore and return Rs 130 crore worth of unsecured loans to Essar Steel. The sale of equity will bring in $ 71.4 million into Essar Steel's and $15.3 million into Essar Oil's reserves.
It has spun off its pelletisation plant in Vizag as a separate company Essar Minerals on the advice of institutions. The FIS have assessed its Vizag assets at Rs1,OOO crore - about Rs400 crore in equity and Rs600 crare in debt. Stemcor, a large international trading house, wants to acquire 51 per cent of the equity in Essar Minerals. Essar Steel is diluting its holding by issuing fresh equity worth Rs180 crore to Stemcor, thereby giving it about 30 per cent. This fresh equity infusion will go into the completion of the pipeline and beneficiation project. Whatever stock Stemcor buys from Essar Steel later to gain a majority within the Rs580-crore total equity will go to Essar Steel. This divestment will also lead to the transfer of Rs500 crore in debt from Essar Steel to Essar Minerals.
By acquiring a majority stake in Essar Minerals, Stem cor will get an assured source of DR-grade pellets for supply to China, Southeast Asia, Iran, Qatar, etc. "The slurry pipeline has already been bought. The beneficiation plant has also been bought and both are lying in Vizag. Stemcor's money will help us complete it.
We have decided that we are not going to invest any more in the project. Whatever more money is required to complete the pipeline and later build the second plant will be brought in by Stemcor,” says Prashant Ruia. “However, as in the sale of Essar power, we have made sure that Essar Steel will get an assured supply, in this case of DR-grade pellets,“ adds Ravi Ruia. The total equity of the project as it stands will be about Rs600 crore and debt Rs900 crore. The additional Rs300 odd-crore in debt will be arranged by Stemcor. Trading houses Internationally are acquiring assets like this for assured supplied. Instead of doing spot trading they want long-term supplied, which helps them moderate the cyclicals. Similarly, another trading house called Deferco has bought steel mills in Russia and the US, and is emerging as a large investor.
Riding out of death valley
These two moves themselves will remove over Rs2,l 00 crore in debt from Essar Steel's books, since Rs1,550 crore is being taken over by Marathon and Rs600 crore transferred to Essar Minerals, in which Essar Steel will have a minority stake. This will reduce the debt-equity ratio from the current 2:1 to 1.34:1. It should be noted that the debt-equity ratios for two other major steel projects - Ispat and Jindal- stand at 3.51:1 and 2.88:1 respectively. Already Essar's cost of production is $230 per tonne and hectic efforts are on at Hazira to reduce this by another $ 7-10 using hot sponge iron for steel, a pioneering effort in many ways. Phase II of debottlenecking is in progress to increase the capacity of the plant to 2.4 Mt with no new investments. In short, Essar Steel will be raring to go in the expected upcycle in steel. A 22 June report by World Steel Dynamics Inc predicts that the international steel market has crossed the "death valley" of $185-240 a tonne - the lowest in the last 20 years. In fact, Essar has already started booking orders at $250-260 a tonne for exports," says]. Mehra, managing director of Essar Steel. "It is clear that commodities need branding as well, and that is why we are on a major marketing and market development campaign to highlight the quality of our product, for which people are ready to pay a premium,” says Prashant Ruia.
The default by Essar Steel on the redemption of its FRNs worth $250 million also has an interesting backgroungd. The FRNS were raised in the international market in 1994 with a maturity period o five years. The event itself was a first for an Indian company. The steel sector internationally has access to long-term loans extending anywhere from 12-15 years. However, at that time, such long-term mony was not available for Indian steel compnies. Today, steel manufacturers can raise money which will mature after 12 years. Since this debt was part of the project as appraised by financial institutions and not outside of it, Essar Steel assumed that the FIS would refinance it to meet the new 12-year norm. Meanwhile, not willing to rely on them, since the PIS were already heavily exposed to the group (though within their prudential norms), Essar tried to raise the money to refinance the FRNS in the international market more than a year before redemption. In fact, lead manager Lehman Brothers Securities Asia Ltd had prepared a prospectus for an issue of $200 million notes due AD 2008 and $200 million notes due AD 2018 in early 1998. However, Pokhran-II buried all hopes for the issue. Since the finance minister had promised in Parliament that no Indian company would suffer as a result of the sanctions, and so on, Essar assumed that Indian banks and financial institutions would now refinance the FRNS and that too on merit and not as a favour. However, these hopes were belied when they advised them to seek a roll-over from the noteholders. Rollover is a euphemism for default. Essar hoped against hope till the last moment and finally wrote a letter to all the noteholders through Chase Securities, trustee to the issue. "The company is currently examining the possibility of refinancing the notes or seeking an extension of the maturity of the notes. The company intends to present a comprehensive plan within 90 days of the scheduled redemption date. The company proposes to pay the interest due on the FRNS shortly," the letter said.
"They are not Real Value (remember the Vacumizer?). After all, how many business groups in India have built up assets of about Rs15,000 crore in the last 10 or even 20 years?" asks R. Sankaran, chairman of IndGlobal Trust, the only banker who was willing to go on record, which points to the prevailing atmosphere. "They have my sympathy. They started the project when there was 140 per cent duty protection on imports of steel and interest rates were 17-18 percent. By the time they came up with the project, duties were down to 25-30 per cent. Under these circumstances, how do you put up global capacities and be competitive?" Warming up to the subject, Sankaran says, "As far as the fRNS are concerned, the issue is very simple. IDBI and other institutions should be asked what they were doing all this time. SBI had also said it would finance it. Where are they? Everybody knew that the notes were coming to maturity. Six months back they were quoted at a 40 per cent discount. The institutions could have saved the country $100 million by buying the notes from the market at that time and extinguishing them, and then asking Essar to pay up the $250-million loan.
A top SBI official acknowledged, "The rolling-over of the FRNS is viewed as a technical default in India. But in the international markets it is done quite often even by reputed corporates and MNCS. There is nothing wrong with the Essar Group. It miscalculated its strategy and the current imbroglio is the price it had had to pay. But the group still has steam left in it and is restructuring its businesses. Indian banks and DFIS will not increase their support to Essar because they have reached their lending limits and because it has become a politically sensitive issue. But I am sure Essar will raise the money from some bank overseas." A large number of people we met in the financial community expressed similar views and were similarly averse to going on record.
The attitude, however understandable, cannot be justified. After all, a banker is a trustee of public money. Other than matters that govern fiduciary confidentiality, his opinion on an important corporate issue, whether it is favourable to the company or not, is a matter of public interest. Remember, it is these very gentlemen who, in endless streams of appraisal notes, assure their boards that, in the present globalising economy, these mega projects are not only viable but, indeed, desirable. Of course, if a promoter, however well intentioned, has proved to be incompetent, the bankers who have put public money into the company have every right to remove him from management control and bring in their own team, which is the international practice.
"In the last 15 days I have learnt what I couldn't have in 15 years," says young Prashant Ruia. The major mistake Essar made is that, while launching its global-sized projects in steel and oil, it did not fully comprehend the ramifications of the term 'financial closure'. But that is all in hindsight. After all, till Enron made the term popular, how many of us knew it or how many companies understood it? Today, of course, it is as sacred as "motherhood" in Essar House. "By nature I am loath to borrowing money. After nearly 20 years as a successful entrepreneur I raised my first loan for the sponge iron plant," says Shashi Ruia. Who knows, after the shock of default wears off, he might still come up with some surprises and remove this blemish.
Today, looking out of his office at Essar House towards Mahalaxmi race course, he hasn't the stomach for further financial gambles of any sort. "Financial closure first," he says. A bit uncharacteristic for a man who became a legend for his risk-taking in Indian ports from Kakinada to Tuticorin, from Goa to Mangalore and Chennai to Mumbai, and succeeding when he was barely in his 20s. But that is what tempering is all about - it means moderation and steeling. He could retire, handing the business over to the younger ones, and take to golf at Willing don and improve his present handicap. But he will have none of it - his eyes are set on the choppy Arabian Sea and, like a true shipper, he assures you that the rough seas will pass. He would rather engage in an animated discussion about the latest telecom technologies than wallow in the memories of the good old days in the docks. With that kind of determination, it should surprise nobody if the tempered Ruias bounce back in the not-too-distant future. After all another group, Reliance, went through similar rough seas in the 1980s and fought their way back.
Friday, August 10, 2007
Reliance Story
Business India, July 14-27, 1997
Playing to win
With the commissioning of the largest multi-feed cracker in the world at Hazira, Reliance catapults itself into the world of petrochemical giants
Shivanand Kanavi
Scene 1: The place: Oriental Hotel in Singapore. The event: A discreet meeting of major polymer producers from Korea, Indonesia, Thailand, Malaysia, Singapore, Japan and Saudi Arabia, with the Americans joining later for an 'informal' dinner. The host: A senior executive of an Indian company. The agenda: Problems of the global plastics industry, falling polymer prices and dumping in each others' markets.
Such a get-together is taking place for the first time. Once the pleasantries are over, the Indian executive softly informs the others that if they continue to dump polyethylene into India then he will pay them back with interest in their home markets. After all, the executive says, all it takes is a small, well-directed consignment to spoil a market. The words are heeded. The dumping stops soon after.
Scene 2: Another time and another place. Some European producers of linear alkyl benzene (LAB) are similarly cautioned by this company against dumping into India. This time, too, the words are heeded
The Company: Reliance
Reliance provokes extreme reactions in India. Either you are pro-Reliance or anti-Reliance. There is nothing in between. To many, God is a poor second cousin to Dhirubhai Ambani, the chairman of Reliance Industries Ltd (RIL). To others, the Ambanis typify the seamy side of big business: fixing import quotas, pre-empting licences and switching share certificates. Amidst such extremes, public drama, recrimination and bitter controversies, RIL has built up huge capacities at extremely competitive costs and become a force to reckon with in petrochemicals.
This is a story of dominance. In the licence regime, RIL used every trick in the book to control competition and carve out niches in whichever market they operated. With the gradual opening up since the late 1980s, Reliance changed gear. Despite their formidable political and bureaucratic clout and their profound understanding of power, Dhirubhai and his sons, Anil and Mukesh Ambani, realised that the new globalised game would be one of scale, competitiveness, technological prowess and market dominance. Hav ing created one of India's greatest synthetic textile brands - Vimal - the troika decided that real power came with backward integration and huge, globally comparable scales of operation. Once the strategy was decided, RiL executed it with a vengeance, even at the cost of short- and medium-term shareholder value.
With his recent dramatic announcement of the 1: 1 bonus share issue after a hiatus of 14 years, Dhirubhai is again back to being the God of the shareholders. Divinity aside, what Business India found was a remarkable story of the emergence of a highly competitive mega-corporation with skills and vision required to compete in a globalising economy. Well on its way to hitting $8-10 billion by the year 2000, the Reliance group is possibly the only real global giant in India.
From cloth to cracking
RIL emerged in the early 1970s as a pioneer in branded textiles. In the early years, when RIL'S Naroda mill was in its infancy, Dhirubhai and his cousin, the late Rasikbhai Meswani, built the brand with cloth produced by thousands of powerloom weavers in Surat. Excellent production and finishing supported by a sustained media campaign that lasted for over two decades made Vimal a household word. As if that were not enough, RIL became the company that developed the equity cult. With public offers of shares and partially convertible debentures, RIL went straight to small investors to raise huge sums of money long before the phrase 'primary market' entered the Nariman Point lexicon.
In 1982, RIL honed in on backward integration. Given the polyester content in Vimal fabrics, the obvious choice was to manufacture polyester staple fibre (PSF) and polyester filament yarn (PFY). The PFY plant was launched in Patalganga (Maharashtra) in 1982, which was followed by PSF capacity in 1986. The next step was to move backward into purified terephthalic acid (PTA) in 1986 and paraxylene (input for PTA) in 1988. The market for detergent input was captured by setting up a capacity to manufacture linear alkyl benzene (LAB) in 1987. Then, in 1991, the Reliance group went in for the most ambitious project of them all at Hazira. Besides housing the largest single multi-feed ethylene cracker in the world, Hazira is a complex of a dozen global-sized downstream plants producing polyethylene, polypropylene, polyvinyl chloride (PVC), PFY, PSF, polyester terapthalate (PET) and intermediates like vinyl chloride monomer (VCM), MEG and PTA. The cracker plant was commissioned in March this year and, with the exception of the PET and the sec ond PTA plant, the Hazira project has been completed.
"There has never been in the history of chemical industry in India something as big as the Hazira complex.," says internationally recognised chemical engineer M.M. Sharma, whose effusiveness may be partly because Mukesh Ambani was his student. But, the fact remains that the combined annual cracking capacity of IPCL (at Baroda and Nagothane), Nocil and the smaller crackers put together is less than Hazira's capacity. An unabashed Reliance fan, Sharma says, "Knowing their capacity to debottleneck, put balancing equipment and expand, I will be disappointed if the Hazira plant does not produce a million tonnes of ethylene within two years."
The six-tenth rule
The technological key to RIL'S expansion in petrochemicals is increasing returns to scale. Continuous process chemical industries are characterised by cylindrical pipes and reactors. There is a simple mathematical property that the area of the cross-section of a cylinder increases as a square of the radius. This yields the famous 'six-tenth rule' that is beloved of chemical engineers: if capacity rises from 300,000 tonnes per annum (tpa) to 750,000 tpa (i.e. 2.5 times), then the cost of production will only increase by a factor of 1.73. Of course, the mathematics makes even more sense if one adds the purely commercial advantage of negotiating bargain basement prices in bulk purchase of plant equipment and raw materials not to mention the ability to use giant scales to pre-empt competition.
While the advantages of economies of scale are well known, there are serious obstacles in putting up globally sized chemical plants in India, such as the lack of infrastructure to handle raw materials, inadequate port and jetty facilities, erratic power and water supply and non-availability of huge funds at internationally comparable costs. What sets Reliance apart is the manner in which it has levelled this uneven playing field by meticulous project planning, excellent system engineering and swift project implementation backed up by the trading savvy of three of the sharpest entrepreneurial minds in the country. To overcome infrastructure problems, RIL has gone ahead to create self sufficient islands of in-house facilities. For example, it has built its own jetties in Hazira and a single buoy mooring 5 km off the coast for large tankers to transfer liquids directly into the storage space (called tank farms). All RIL sites are self-sufficient in power. The infrastructure that has put RIL on the world map is the ethylene terminal at Hazira. Since the cracker plant was to be commissioned at the very end, RIL needed large-scale imports of ethylene for their downstream pvc and PET plants. So they built a cryogenic terminal for transferring ethylene at -138°C in deep seas. "That was the first time it was done in the world, " recalls Anil Ambani. "Everybody told us ethylene transfer is unsafe and definitely not possible in a country like India. But once we proved that we can do it, and do it safely, others in the world are copying it."
Sweating it out
“A major strength of RIL is the way they integrate their projects," says Pradeep Shah of Indocean Venture and a long-time Reliance watcher. The importance of integrating backwards is a lesson that RIL learnt from the Patalganga project. PTA and DMT require paraxylene as feedstock, which had to be imported. Since India had hardly any infrastructure to handle imported chemicals, the Ambanis had no hesitation in going for a paraxylene plant with technology from the world leader, Universal Oil Products (UOP). Their next-door neighbour, Bombay Dyeing, which had put up a dimethyl terapthalate (DMT) plant, suffered because it depended on imported paraxylene.
The paraxylene plant required naphtha as feedstock. Instead of relying on tanker movement by road from Mumbai to Patalganga, RIL quickly laid a pipeline to Bharat Petroleum's refinery. When they discovered that the hydrogen produced in the catalytic cracking of naphtha was being flared away, RIL diverted it to the PTA plant where hydrogen is needed. Similarly, instead of wasting the nitrogen by-product in the PTA plant, RIL used it as a conveyor gas. Byproducts of naphtha cracking are used in gas turbines, and kerosene, from which paraffins are extracted for making LAB, are similarly burnt. Any extra heat in a process is not wasted, but used to pre-heat various feedstock.
But system and backward integration are not all. According to Mukesh Ambani, one of the main reasons RIL's 1996-97 performance was better than expected by analysts is the use of 'sweat technology,' or making the plants produce more through clever chemical engineering. Teams work relentlessly to milk as much as possible from the plants. For example, the engineers at Patalganga discovered that adding another compressor and supplying more air to the reactor where paraxylene gets oxidised in the PTA plant would enhance the output greatly. Immediately, the cost-benefit ratio was worked out and an expensive 30-tonne compressor added. Today, the engineers are not fully satisfied. Up to now, only 23 tonnes of air are being used. So a team is working on how t0 use the remaining seven tonnes.
Clearly 'sweating' pays off. A case in point is PVC production. IPCL uses 420 cubic metres of total reactor volume to produce 50,000 tpa of PVC, while Finolex uses 500 cubic metres to produce 110,000 tpa. In contrast, RIL'S first pvc plant at Hazira utilises 560 cubic metres to produce 180,000 tpa. "When our people went recently to Geon, the company which supplied the technology for our I've plant, they were told Reliance has nothing more to learn in PVC technology," says K. Ramamurthy, president of RIL's polymer division.
The Vanvas is over
RIL's triumphal return to its shareholders
People had written him off as an old man who had lost his magic touch. On 26 June, 1997, in the middle of RIL's annual general meeting, Dhirubhai Ambani announced an interruption with a board meeting to discuss bonus shares. The market began to oscillate wildly. Then Dhirubhai came back and asked the shareholders, "What do you want?" The roar of "One is to one!" reverberated across Birla Matushree Hall. He grinned, paused, and said, "You have it." The market went gaga as Lord Dhirubhai returned to his throne.
With the bonus issue after 14 years, the Ambanis have outfoxed equity analysts once again. "We need to be good at psychoanalysis to predict their results," says an analyst jocularly. According to Jal Irani of Jardine Fleming, "Petrochem analysts have difficulty in quantifying the effect of economies of scale on manufacturing costs and hence the bottomline." Read that as a confession, "We don't know."
But, corporate watchers are happy to eat crow, delighted as they are to see one of India's fastest growing companies churning out a better-than-expected performance. Analysts predicted net profits ranging from Rs900-1, 100 crore. Instead, RIL overcame depressed petrochemical prices to post a net profit of over Rs1 ,300 crore in 1996-97, which was 1.3 per cent higher than the previous year. It managed to buck the industry trend by pushing volumes. The turnover for 1996-97 (Rs9,31 0 crore, of which Rs290 crore is other income) is 12 per cent higher than the previous year.
The view of analysts is that despite the controversies that have dogged Reliance, "it has
created assets for all to see." The asset growth is quite phenomenal. Between 31 March, 1992 and March, 1997, RIL's total assets have increased at? compound annual rate of almost 28 per cent for the last five years and now stand at Rs19,536 crore. Last year alone it increased by 30 per cent.
This growth has been financed through higher leveraging. At a time when India's equity market was in the bear phase, the Ambanis were the first major to tap the overseas debt market with long term debt, including the 100-year Yankee bond. As of March, 1997, about 62 per cent of the total debt is foreign currency denominated. However, such leveraging carries risk. RIL's overall debt/equity ratio has risen from 0.49:1 in 1995-96 to 0.83:1 in 1996-97. Consequently, the interest bill has increased by over 54 per cent from Rs110 to Rs1 70 crore. This, plus a 22 per cent jump in depreciation (to Rs 410 crore) and Rs45 crore on account of the minimum alternate tax (MAT) has contained RIL'S post-tax profit at Rs1 ,323 crore - up by only 1 .3 per cent over that of last year. The rise in depreciation was because RIL responded to MAT by changing the method of calculation from straight-line to written-down value.
Have the results been dressed up? Some analysts have asked how a 35 per cent increase in volume can be achieved with a less than 12 per cent rise in manufacturing expenditure. Granted that raw material costs have come down, but labour, power and other costs, plus inflation, should have pushed manufacturing costs higher. The Ambanis attribute this to ruthless operational efficiencies. "We make our plants sweat and try to squeeze the maximum out of them," says Mukesh.
The fact is that RIL has successfully withstood the pressures of 1996-97 - one of the most difficult and recessionary years for the petrochem industry. Today, the company has world-class plants, integrated facilities and state-of-the-art technology. RIL also has one of the lowest employee costs (2.7 per cent of sales), although the capital cost of newly set-up plants would be higher when compared to depreciated facilities of major global competitors. While RIL is diversifying into oil, gas, power and telecom, its mainstay in next three to four years will be petrochemicals and polyester.
According to some analysts, the current year will see RPL make full use of its capacity expansion and total integration from crude oil and cracking facilities to downstream fibres and cloth to post a phenomenal growth in sales and earnings. Mahesh Talreja of Ventura Securities places the estimated growth in earning for 1997-98 at 56 per cent and "an EPS of Rs45 on its pre-bonus issue equity." Rupa Bose of Banque Paribas differs. In her report, she predicts a 20 per cent increase in PAT to the region of Rs1 ,640 crore and a more modest 23-24 per cent growth in EPS. Jardine Fleming's latest PAT projections are similar: Rs1 ,611 crore.
Even if the conservatives are right, it would be an impressive performance. But you can never tell with Dhirubhai. The old fox could stun the market yet again next year. If he does, the analysts will be seen at the Zodiac Grill ecstatically eating Crow a la Languedoc!
Calculated risks
"We can deal with the risks in petrochemicals like the process design risk, feedstock risk, operational risk or the market risk as well as anyone else in the world," asserts Mukesh Ambani. But their record shows that it is no empty bravado.
The first attempt at risk-taking was at Patalganga, when RIL took its chances by putting up capacities that were bigger than the entire Indian market for PFY and PSF. It paid off. India's market for synthetic and blended cloth grew by leaps and bounds in the 1980s and early 1990s despite adverse excise duties vis-a-vis cotton. Soon afterwards, the decision to bet on the new technology from ICI of making PTA, a feedstock for polyester, was taken despite the fact that, at that time, DMT was the proven raw material. The risk was taken because the PTA route did not need an intermediate extraction plant and, hence, translated to a lower capital cost. Again, the risk paid off. Today the PTA-vs-DMT controversy has been globally settled in favour of PTA.
Similarly, when RIL was putting up its first pvc plant in Hazira in 199091, the rated output of 180,000 tpa was larger than the total Indian demand. Today, RIL has expanded their capacity in the same plant to 275,000 tpa, and the market has not only absorbed this output but that of others like Finolex and IPCL as well. And Reliance isn't satisfied. Ramamurthy of the polymer division is planning to increase the Hazira capacity to 310,000 tpa. As a Reliance watcher and family insider pointed out, "The hallmark of the father and sons is that after meticulous research they rely on their sharp trading instinct. It is this instinct that makes them incessantly bet on growth and virtually create the growth by generating massive economies of scale."
The Jamnagar experiment
Reliance's emphasis on system integration, which evolved at Patalganga, has become a way of life in project planning. While the Hazira complex has numerous examples of such integration, RIL'S Jamnagar refinery might become a textbook case. When asked why the entire technology package for the ]amnagar project was awarded to UOP, Mukesh Ambani pointed out, "Large benefits are going to come from clever feedstock and heat integration. That can only happen when the right hand knows what the left hand is doing."
All components of the output at Jamnagar are either end products or by-products that are to be used somewhere as a feedstock for high-value petrochemicals or as fuel for generating process heat. In fact, petrochemical experts estimate that, when the entire system stabilises, no more than 0.2 per cent of the refinery throughput will be wasted. If that happens, it will be a world record, because the international wastage figure for refineries hovers around 5 per cent.
RIL's system planning often takes place well before the project is implemented. For instance, when BHEL engineers were asked four years ago by Reliance to experiment with petroleum coke as boiler fuel, they were naturally puzzled. It is now evident that even in 1993-94, the RIL team was looking at ways to use refinery residue - six years before the complex was due for completion. The experiment worked. Now, the gameplan is to convert refinery residue into petroleum coke to be used for the in-house power project to generate 1,000 MW of power.
When phase one is completed in 1999, the Jamnagar refinery project will be truly mind-boggling. It will not only supply 3 million tonnes of naphtha to Hazira but also enough propene as feedstock for another 400,OOO-tonne polypropylene plant and a 1.2-million tonne paraxylene complex in Jamnagar. Petrochemical engineers expect that the second phase at Jamnagar (starting from 2001) will produce another 1 million tonnes of ethylene as well as high-value petrochemicals for use in drugs, dyes and paints, unleaded petrol, food additives and polystyrene foam. In fact, a senior technologist at uop said that RIL is actually driving refining technologies in new directions - away from traditional refining towards high-value petrochemicals.
Jack be nimble ...
"Without flexibility in operations one cannot quickly respond to market conditions," says Mukesh Ambani. Said by many, done by few. In Reliance's case, flexibility seems to be the holy word - be it in engineering, systems design or financial deal-making. Consider just the production side. The polyethylene plant at Hazira has a swing reactor that can produce, with hardly any change, either high-density polyethylene (HDPE) or linear low-density polyethylene (LLDPE) according to market requirements. The cracker at Hazira is designed to use gas, liquefied natural gas, naphtha or gas oil as feedstock. "Since feedstock prices cannot be predicted, RIL has the flexibility to use whichever combination that increases our operating margins," explains Mukesh Ambani. "Considering the lifecycle cost of the cracker, the extra investment on a multi-feed cracker is marginal."
This agility translates to greater value addition. Earlier, RIL was spending $1,300 on ethylene to produce about $2,800 of products. Today, the cracker uses no more than $600 worth of naphtha to produce the same end value. "We hope to make a profit of Rs2,200-3,000 crore every year from Hazira alone," exults Ramamurthy. According to him, even if global petrochemical prices fall by 10-15 per cent, the high value addition at Hazira will sufficiently insulate RIL from such downturns. "On top of it, our marketing. costs are extremely low," says Ramamurthy. "We spend $3 per tonne for marketing $800 of plastic. Our total distribution cost of plastics to any point in India is $26 a tonne. Let anyone who wants to enter the Indian market beat that!"
New horizons
RIL has never been shy of seizing a business opportunity: Here is a peek at some of the things they're getting into
Power
Reliance Power is a separate company wholly-owned by RIL. A power purchase agreement (PPA) has been signed for the 41 0 MW Patalganga project and is now awaiting techno-economic clearance for financial closure. The Bhawana 423 MW project is waiting for PPA to be signed. Reliance is also bidding for a 2,000 MW super thermal pit head project in Bihar and a 800 MW hydel project in Himachal and 1,200 MW hydel project in Sikkim.
Telecom
Reliance Telecom, another separate com pany with 10 per cent participation from Nynex, has won cellular licences for seven circles: Madhya Pradesh, Orissa, West Bengal, Bihar,Sikkim and the seven sisters of the northeast. RIL was the first to sign the agreement with DoT to pay the required fees and is in fact well on its way to starting cellular service in 22 cities.
Oil & Gas
Oil & Gas is a division of RIL. The ONGC- Enron-RIL (40:30:30) joint venture is pumping out over 12,000 barrels of oil daily from Panna and Mukta. These fields were termed marginal and uneconomical by ONGC. RIL found that with their project management expertise the cost of recovery could be lowered 20-30 per cent and, with Enron agreeing to a lower internal rate of return, the project became viable.
They have also hit gas at Tapti. One million cubic metres of gas will soon flow daily to Hazira. Since there are problems in sharing the existing pipeline with ONGC, RIL is trying to convince its partners to go in for a separate gas pipeline. Another promising deal is being negotiated in Iraq between the Iraqi government and RIL-ONGC videsh. If it comes through, this field should yield in one day (about 200,000 barrels) the entire production from Bombay High.
Master builders
While RIL'S low capital and operational costs are recognised globally, another factor which makes them competitive is the speed at which they erect plants. All the Hazira plants were erected in record times, with the giant cracker coming up in only 29 months. All indicators point to Jamnagar proceeding at an even more frenetic pace. According to Sharma, "The main reason is that the Ambanis sit on everybody's head, be they contractors, sub-contractors, or employees, and put in long hours themselves. Do you know that there were a couple of CMD's of IPCL who never spent a night at Nagothane when it was coming up, even though it was their biggest investment at that time?" Hetal Meswani, a cousin of Mukesh and Anil and an executive director of RIL, was literally living in Hazira during construction and has now moved to Jamnagar. Engineers recall how Mukesh Ambani would spend days on end at Patalganga when it was coming up.
Today there are daily video conferences between Mumbai, Jamnagar and the London office of Bechtel, who are doing the engineering work for the refinery project. There is a team of RIL engineers sitting in the London office of Bechtel, while a team of Bechtel engineers is at Jamnagar. New technologies are being adopted to speed up construction. "We found that 40 per cent of the time in erecting piping is taken up by welding the joints," says S.C. Malhotra, technical executive director of Reliance Industrial Infrastructure, a Reliance group company. "So we decided to spend a few crore and automate the whole thing by going for a giant induction pipe-bending machine that can bend even a 2-ft diameter steel pipe into any angle."
Blurring boundaries
"Do you think a modern Rs10,000 crore business can be run by two brothers?" asks an executive rhetorically. From foremen, site supervisors and middle-level plant managers to vice-presidents and presidents, every one in RIL is given considerable autonomy. According to Pradip Shah, that is one reason why Reliance has such a strong core group of highly talented professionals in marketing, finance, operations, projects, construction, telecom, power, oil and gas, fibre, intermediates, polymers and textiles. It is a peculiar but successful amalgam - the family makes the key decisions, which are then meticulously executed by professionals.
"In the best companies of the world the boundaries between technology, finance, and marketing have collapsed," points out Mukesh Ambani. Just as the siblings don't have any rigid compartmentalisation of responsibilities, so too do many of the top executives of RIL. "I was coming from a conference in Singapore and I heard about a good trading opportunity in Jakarta," says C.S. Gokhale, who runs the fibre intermediates division. "So, I rang up Mukesh and he not only agreecd with me but asked me to come via Jakarta and clinch the deal. There are no barriers iuch as this is a purchase function and somebody else has to do it. After all, when I joined RIL, I was told that I will be an owner-manager, and I have no doubts on that." Hemant Desai, vice-president in charge of polymer plants at Hazira, also emphasises the importance of being a wellrounded manager. "I used to be in fibre marketing; today I am in polymers; tomorrow if I have to go to Jamnagar and talk to the sarpanch of Mothikavdi [the village next to RIL'S site] I will do that." The motto is if it benefits the company, go ahead and just do it.
It is that motto which has driven RIL relentlessly. In the process, it has made enemies, occasionally bent laws and liberally buttered bread on both sides. But even Reliance's worst detractor cannot ignore four simple facts: it has created a massive asset base in the fastest possible time; it has produced successful plants on truly global scales; its costs are internationally competitive in the truest sense of the term; and that has given it consistent long-term value to 2.6 million shareholders. No company can beat that. Not yet, anyway.
Sibling speak
Excerpts from interviews
We will benchmark with the top 100 companies in the world
MUKESH AMBANI
• We have always believed that we shouldn't get into anything because it was in fashion or everybody else was doing it. We must first understand it thoroughly. Then we back it up with dedicated leadership, which is not restricted to my father or myself and my brother.
• Our projections for the group in 1999-2000 are assets worth Rs30,000-35,000 crore and a turnover between Rs40,000-50,000 crore.
• If the administered pricing mechanism for petroleum is lifted and crude is decanalised, then with the way we have . configured the Jamnagar refinery, Reliance will be globally competitive.
• Refineries of the future will be fully integrated with petrochemicals and power. We were the first in the world to think that way and the first to build such a refinery.
• After Jamnagar, we will grow upstream into oil and gas and energy. For that we might even have to go outside India, and have already bid for Iraq sites with ONGC videsh. The new exploration policy itself will open up opportunities in India. If there is any oil in India then Reliance will definitely find it.
• Right now we are having discussions with IOC about fuel distribution from the Jamnagar refinery. There is merit in India's oil majors getting together to reduce distribution costs.
• We won't move into a gas cracker project in Assam until it is clear what feedstock we are going to get. Only then can we employ our knowledge and add maximum value to the project. In India, people are not used to up-front rigorous analysis. Instead, they prefer foundation stone-laying ceremonies. Let us first be clear about what we will get. That is better than to assume something and have problems later.
• Reliance will get listed on Wall Street because we want to benchmark ourselves with the top 100 companies of the world.
We have the lowest capital expenditure costs globally
ANIL AMBANI
• Our capex costs are the lowest because we do not look at a plant as a black box. We break it into every possible component, and optimise what we can do in India and what we can do offshore. Our aggression also comes from scale. We believe in having rate contracts. Also we buy everything with cash. If the vendor has to provide finance, he jacks up the price by say 20 per cent. Similarly we give the site contractors assured work in exchange of which they are ready to take a knock on the margins.
• The skills we built in the chemical industry we are repeating in telecom. Our costs are far lower than any other telecom company in India. Investors are applauding our telecom strategy - to pay the lowest possible licence fee and aim for the highest geographical spread. This will give us the ability to innovate in marketing and tariffs.
• We are not going to have 30 telecom operators in India. There will be a shakeout. Nearly 20 licences, including HFCL's, are up for sale. If the rules of the game change, then Reliance will be in the frontline buying some of them out.
• What's the big deal about P/E ratios? In the 1980s and 1990s, Shell was quoting at two times earnings! Isn't Shell a great company? In the lifecycle of every company, there are ups and downs. Look at IPCL. They have no merger, no private placement, no seeming controversy, are a strong petrochemical player, have scale, integration, depreciated assets, 51 per cent owned by the government, no fear of great dilution, all accounts are certified by any number of government agencies. Then why is it quoting at four times earnings and RIL is quoting at ten times earnings? There is no rationale.
• As India integrates with the global economy, people will begin to understand the value of assets. For people who are interested in looking at the long term, these are very exciting times.
Book Review-- Maths-S Ramanujan
Ramanujan: Letters and Commentary (History of Mathematics, Vol 9)-- by Bruce C. Berndt, Robert A. Rankin
It is lonely at the top
Shivanand Kanavi
"I beg to introduce myself to you as a clerk in the accounts department of the Port Trust Office at Madras .... ". Thus started the most famous letter in 20th century mathematics, written by Srinivasa Ramanujan to Godfrey I-tarold Hardy.
Was Ramanujan, afraid that proofs of his theorems may be stolen by the dons at Cambridge or was he afraid of being ridiculed for his intuitionistic methods? Was he really afraid that he will be "polluted" by going to England or was he pressured into refusing to go by other orthodox Brahmins, and so on are among the many questions that are raised by this latest collection of Ramnaujan letters, edited by two mathematicians, B.C.Berndt and R.A.Rankin.
Ramanujan's method of stating an important result and providing some 'hand waving' arguments as the basis of the result rather than give rigorous proofs was unique and mathematicians like MJ.M.Hill dismissed his genius. One of the reasons for the cryptic nature of his proofs was his notation which he very much kept to himself and the other was that many a time his "proof" will involve leaps that could not be bridged by rigorous mathematics. Nevertheless G.H.Hardy recognised the genius and endeavoured successfully to get him to come to Cambridge. In fact the collection contains a letter written by Bertrand Russel to one of his women friends wherein he mentions, "I found Hardy and Littlewood in a state of wild excitement, because they believe they have discovered a second Newton, a Hindu clerk in Madras".
But actually, Hardy's close associate J.E.Littlewood thought otherwise, in a letter he told Hardy that, he placed Ramanujan on par with Jacobi (important Hungarian mathematician, but not up to the stature of Newton). He also thought Ramanujan was not disclosing his proofs because he probably feared that English mathematicians might "steal" his results! Ramanujan expressed his pain on reading the same allusion in Hardy's reply to his first letter, but surprisingly did not disclose any more information regarding his methods. Instead he wrote, "I am already a half starving man. To preserve my brains I want food and this is now my first consideration. Any sympathetic letter from you will be helpful to me here to get a scholarship either from the University or the government", and added a few more results in his famous second letter. Considering his economic plight and the craving for professional peer recognition and even critique and considering the plundering of India in the hands of Britain his unexpressed fears are understandable.
A misconception cleared by the collection under review is regarding Ramanujan's orthodoxy that. prevented him from accepting the invitation to go to Cambridge. In a letter to Hardy, Ramanujan explained that when the offer was made by C.E.Mallet of India Office, London, it was too vague and besides it brought visions of having to appear for a civil service examination. This made him hesitate and mean while, his boss, an orthodox Brahmin, who was accompanying him, intervened and categorically told mallet that Ramanujan cannot go due to religious reasons. It is clear from the letters that Ramanujan was actually looking forward to meeting the best mathematical minds of Europe.
The letters also bring out the loneliness he suffered during his illness first in England and then in India. However being extremely conscientious and grateful for the fellowship he kept sending new results despite severe illness.(The illness which was never diagnosed properly has now been diagnosed as amoebiasis of the liver according to the authors). In fact Hardy's letter to J.J.Thompson (Nobel Laureate physicist and president of the Royal Society) shows that fearing the worst and aiming to give some incentive to Ramanujan to fight the illness, Hardy lobbied for the early award of the Fellowship of the Royal Society.
Though after his death his family members engaged in a sordid exhibition of greed and propensity to cash in on respect and sympathy for Ramanujan, he himself exhibited his generosity by asking his family to actually give some money for scholarships to poor students.
The collection is a valuable addition to the growing literature about Ramanujan's life and work. The editors have taken particular pains to add fairly detailed biographical notes on all the individuals that are mentioned in the letters, thereby giving a flavour of associates and friends of Ramnaujan. They have also given extensive mathematical notes on the history and evolution of each of Ramanujan's propositions as they appeared in his letters. On the whole it is an enjoyable reading for mathematicians as well as lay public interested in the Indian genius.
It is lonely at the top
Shivanand Kanavi
"I beg to introduce myself to you as a clerk in the accounts department of the Port Trust Office at Madras .... ". Thus started the most famous letter in 20th century mathematics, written by Srinivasa Ramanujan to Godfrey I-tarold Hardy.
Was Ramanujan, afraid that proofs of his theorems may be stolen by the dons at Cambridge or was he afraid of being ridiculed for his intuitionistic methods? Was he really afraid that he will be "polluted" by going to England or was he pressured into refusing to go by other orthodox Brahmins, and so on are among the many questions that are raised by this latest collection of Ramnaujan letters, edited by two mathematicians, B.C.Berndt and R.A.Rankin.
Ramanujan's method of stating an important result and providing some 'hand waving' arguments as the basis of the result rather than give rigorous proofs was unique and mathematicians like MJ.M.Hill dismissed his genius. One of the reasons for the cryptic nature of his proofs was his notation which he very much kept to himself and the other was that many a time his "proof" will involve leaps that could not be bridged by rigorous mathematics. Nevertheless G.H.Hardy recognised the genius and endeavoured successfully to get him to come to Cambridge. In fact the collection contains a letter written by Bertrand Russel to one of his women friends wherein he mentions, "I found Hardy and Littlewood in a state of wild excitement, because they believe they have discovered a second Newton, a Hindu clerk in Madras".
But actually, Hardy's close associate J.E.Littlewood thought otherwise, in a letter he told Hardy that, he placed Ramanujan on par with Jacobi (important Hungarian mathematician, but not up to the stature of Newton). He also thought Ramanujan was not disclosing his proofs because he probably feared that English mathematicians might "steal" his results! Ramanujan expressed his pain on reading the same allusion in Hardy's reply to his first letter, but surprisingly did not disclose any more information regarding his methods. Instead he wrote, "I am already a half starving man. To preserve my brains I want food and this is now my first consideration. Any sympathetic letter from you will be helpful to me here to get a scholarship either from the University or the government", and added a few more results in his famous second letter. Considering his economic plight and the craving for professional peer recognition and even critique and considering the plundering of India in the hands of Britain his unexpressed fears are understandable.
A misconception cleared by the collection under review is regarding Ramanujan's orthodoxy that. prevented him from accepting the invitation to go to Cambridge. In a letter to Hardy, Ramanujan explained that when the offer was made by C.E.Mallet of India Office, London, it was too vague and besides it brought visions of having to appear for a civil service examination. This made him hesitate and mean while, his boss, an orthodox Brahmin, who was accompanying him, intervened and categorically told mallet that Ramanujan cannot go due to religious reasons. It is clear from the letters that Ramanujan was actually looking forward to meeting the best mathematical minds of Europe.
The letters also bring out the loneliness he suffered during his illness first in England and then in India. However being extremely conscientious and grateful for the fellowship he kept sending new results despite severe illness.(The illness which was never diagnosed properly has now been diagnosed as amoebiasis of the liver according to the authors). In fact Hardy's letter to J.J.Thompson (Nobel Laureate physicist and president of the Royal Society) shows that fearing the worst and aiming to give some incentive to Ramanujan to fight the illness, Hardy lobbied for the early award of the Fellowship of the Royal Society.
Though after his death his family members engaged in a sordid exhibition of greed and propensity to cash in on respect and sympathy for Ramanujan, he himself exhibited his generosity by asking his family to actually give some money for scholarships to poor students.
The collection is a valuable addition to the growing literature about Ramanujan's life and work. The editors have taken particular pains to add fairly detailed biographical notes on all the individuals that are mentioned in the letters, thereby giving a flavour of associates and friends of Ramnaujan. They have also given extensive mathematical notes on the history and evolution of each of Ramanujan's propositions as they appeared in his letters. On the whole it is an enjoyable reading for mathematicians as well as lay public interested in the Indian genius.
Thursday, August 9, 2007
Medicine-Chiral drugs
Business India, February 13-26, 1995
Molecular Jekyll and Hyde
Mirror images of the same molecule could have widely differing effects on living organisms
Shivanand Kanavi
Can the mirror image of an object differ from the original? Common sense would suggest not. But, surprisingly, the mirror image of a molecule may not only be different but even have opposite effects on the human body. The most dramatic example of this duality was thalidomide. Thalidomide-R is a hypnotic drug, introduced in the 1960s, which suppresses signals from the brain, giving rise to nausea and morning sickness in pregnant women. However, when its use resulted in the birth of a large number of severely deformed children, the world was shocked. It was discovered later that the mirror image of thalidomide-R, called thalidomide-S, was present in the dosage in equal quantities and was the culprit that led to these teratogenic, or foetal, effects.
'Chirality' , or the different behaviour of 'enantiomers' (molecular mirror images) was, in fact, discovered way back in 1848 by Louis Pasteur. He found that tartaric acid exists in two forms - which were later found to be mirror images of each other. While one form of tartaric acid polarised incident light in one direction, the other did it in the opposite direction. However, chirality remained little more than a curiosity till the thalidomide tragedy struck.
The last 30 years of research in chirality has yielded many such startling examples. But what is the difference due to? "Nature is chiral," explains A.V. Ramarao, director of the Indian Institute of Chemical Technology, Hyderabad, and a world authority in chiral chemistry. "Amino acids, sugars, enzymes, peptides and carbohydrates found in the human body are chiral. In fact, the complexity of chirality seems to increase in plants and animals that are higher in the evolutionary scale. Higher chirality 'shows greater selectivity in reactions arid higher specialisation in the functions of different molecules. So participants in biochemical reactions like drugs, pesticides, perfumes, flavours, etc., have to be of the right chirality. Only the right key can open the lock. A wrong key at best might not open any lock, as in the case of nontoxic and non-therapeutic ibuprofen-R, or at worst might even open a Pandora's box as in the case of thalidomide-S," he points out.
Even if a mirror image were nontoxic, as in the case of ibuprofen, the fact that the body has to metabolise 50 per cent of the dosage given without any useful effect is tantamount to polluting the human system. This could become particularly serious in old age when painkillers are increasingly used even as the body's metabolism weakens.
Nearly half the drugs that are commercially available in the market have chiral centres and hence exist as paired enantiomers. Many of the pure enantiomers sold today are derived from plants or micro-organisms. Only about 10 per cent of the synthetic drugs are sold as chiral molecules while the rest are marketed as mixtures of both enantiomers called 'racemates'. But the situation is fast changing with drug regulatory authorities in the US, Switzerland and Japan insisting that pharmaceutical companies start introducing new drugs as chirally pure molecules, although no definite deadline has been set for the same. It is expected that nearly 50 per cent of the new drugs in the next ten years will be introduced in a chirally pure form. Among the top-selling drugs today, captopril, enalapril, diltiazem, cefaclor and naproxen are chiral.
So the race is on to develop chiral technology for both old and new drugs. While various methods are available for chiral synthesis, the tricky part is to develop cost-effective methods. Ramarao believes that if we invest time and money in chiral chemistry now in India, we will soon be able to develop the necessary technology and join a select band. His work in the case of a new wonder drug, the immunosuppressant FK-506, has become internationally known – IICT is the only group that has been able to synthesise FK-506 outside the US.
It all began with an innocuous news item that said that a prominent politician from Tamil Nadu who had undergone an organ transplant in the US needed drugs worth Rs50,000 a year to keep him alive. The expenditure raised a storm in the Tamil Nadu assembly. Ramarao found it interesting enough to investigate what the particular drug was. It turned out to be a cyclosporin which is used as a post-operative drug. Following an organ transplant, the body normally tends to reject the new organ as the immune system is programmed to treat it as a foreign body and fight it. Cyclosporins suppress this immune system, thereby making the body co-exist with the new organ. But if the immune system as a whole is suppressed, the body becomes prone to attack by other serious infections. Thus, cyclosporin levels have to be closely monitored and the drug needs to be taken continuously.
A Japanese company introduced FK 506 as the next generation immunosuppressant which has a very high selectivity. In fact, without suppressing the immune system indiscriminately it makes the body accept the new organ. The drug has performed wonders. Recently, a patient at the Pittsburgh medical school needed a liver transplant but, as a human donor was not available and the patient was sure to die, the doctors transplanted a baboon's liver. They then treated him with FK-506; quite incredibly, the patient survived for 30 days!
FK-506 has 14 chiral centres in its structure. During chemical synthesis, one can go wrong at any of the 14 points. By contrast, thalidomide has only one chiral centre. That is why Ramarao and nCT, Hyderabad, created waves in the world of organic synthesis when they succeeded with FK-506. But, as Ramarao admits, "This is still basic research. We are far away from developing a commercially viable process for FK-506." However, BCT'S chiral technology for antihypertensive beta blockers, etc, has already been transferred to industry.
Chiral synthesis has three basic approaches. The first is resolving a racemic mixture of two crystals with different melting points by preferential crystallisation. The anti-typhoid chloramphenicol is separated thus. This is used widely in the industry but hardly 20 per cent of racemates appear in this form of mechanical mixture or 'conglomerates'. In many cases the enantiomers can be resolved by making the mixture react with a pure organic acid or a base of the right chirality. The racemates separate to form two diasteromeric salts, ie salts with two chiral centres where one chiral centre is identical but the other one is different. The popular anti- TB drug ethambutol, phenyl glycine and the cardiovascular drug diltiazem are separated this way. These methods of resolution are industrially very widely used.
The second method is called asymmetric synthesis. Here one makes use of the fact that most natural products such as amino acids, carbohydrates, etc, are chiral. They are used as starting materials and as molecular templates to synthesise the required chirally pure compound. Another popular method is to use chiral catalysts, called 'chemzymes' by Nobel Laureate E.J. Corey. A large number of drugs like Vitamin C, semi-synthetic penicillins, cephalosporins, timolol, propranolol, diltiazem, thienamycin, ampicillin, dopa, naproxen, etc, are manufactured this way, using asymmetric synthesis.
The third method which is also creating a lot of interest is enzymatic transformations. Enzymes are naturally occurring chiral catalysts and are highly selective. The stages in this method involve fermentation to produce the required enzyme, enzymatic transformation reaction, separation of the enzyme without losing its bio-catalytic activity, and separation and purification of the product. One has to find economically viable conversions at all stages. Enzymes can be used to separate racemic mixtures as well as for bioasymmetric synthesis.
Chiral technology will be important enough to attract funds for development in India too. Abbot Laboratories of the US, Lupin Laboratories and Cipla are funding research in this field at IICT. Ramarao is convinced that India, which has already shown its strength in organic synthesis both in academia and industry, can get into the big league in chiral technology if sufficient investment is made in the field now.
Sales of chirally pure drugs crossed $35 billion in 1993
Class of Drugs 1998 world wide Sales ($ billion)
Cardiovascular 11.3
Antibiotics 10.8
Hormones 4.5
Neurological 2.0
Anti-inflammatory 1.5
Anti-cancer 1.0
Others 4.5
Total 35.6
Molecular Jekyll and Hyde
Mirror images of the same molecule could have widely differing effects on living organisms
Shivanand Kanavi
Can the mirror image of an object differ from the original? Common sense would suggest not. But, surprisingly, the mirror image of a molecule may not only be different but even have opposite effects on the human body. The most dramatic example of this duality was thalidomide. Thalidomide-R is a hypnotic drug, introduced in the 1960s, which suppresses signals from the brain, giving rise to nausea and morning sickness in pregnant women. However, when its use resulted in the birth of a large number of severely deformed children, the world was shocked. It was discovered later that the mirror image of thalidomide-R, called thalidomide-S, was present in the dosage in equal quantities and was the culprit that led to these teratogenic, or foetal, effects.
'Chirality' , or the different behaviour of 'enantiomers' (molecular mirror images) was, in fact, discovered way back in 1848 by Louis Pasteur. He found that tartaric acid exists in two forms - which were later found to be mirror images of each other. While one form of tartaric acid polarised incident light in one direction, the other did it in the opposite direction. However, chirality remained little more than a curiosity till the thalidomide tragedy struck.
The last 30 years of research in chirality has yielded many such startling examples. But what is the difference due to? "Nature is chiral," explains A.V. Ramarao, director of the Indian Institute of Chemical Technology, Hyderabad, and a world authority in chiral chemistry. "Amino acids, sugars, enzymes, peptides and carbohydrates found in the human body are chiral. In fact, the complexity of chirality seems to increase in plants and animals that are higher in the evolutionary scale. Higher chirality 'shows greater selectivity in reactions arid higher specialisation in the functions of different molecules. So participants in biochemical reactions like drugs, pesticides, perfumes, flavours, etc., have to be of the right chirality. Only the right key can open the lock. A wrong key at best might not open any lock, as in the case of nontoxic and non-therapeutic ibuprofen-R, or at worst might even open a Pandora's box as in the case of thalidomide-S," he points out.
Even if a mirror image were nontoxic, as in the case of ibuprofen, the fact that the body has to metabolise 50 per cent of the dosage given without any useful effect is tantamount to polluting the human system. This could become particularly serious in old age when painkillers are increasingly used even as the body's metabolism weakens.
Nearly half the drugs that are commercially available in the market have chiral centres and hence exist as paired enantiomers. Many of the pure enantiomers sold today are derived from plants or micro-organisms. Only about 10 per cent of the synthetic drugs are sold as chiral molecules while the rest are marketed as mixtures of both enantiomers called 'racemates'. But the situation is fast changing with drug regulatory authorities in the US, Switzerland and Japan insisting that pharmaceutical companies start introducing new drugs as chirally pure molecules, although no definite deadline has been set for the same. It is expected that nearly 50 per cent of the new drugs in the next ten years will be introduced in a chirally pure form. Among the top-selling drugs today, captopril, enalapril, diltiazem, cefaclor and naproxen are chiral.
So the race is on to develop chiral technology for both old and new drugs. While various methods are available for chiral synthesis, the tricky part is to develop cost-effective methods. Ramarao believes that if we invest time and money in chiral chemistry now in India, we will soon be able to develop the necessary technology and join a select band. His work in the case of a new wonder drug, the immunosuppressant FK-506, has become internationally known – IICT is the only group that has been able to synthesise FK-506 outside the US.
It all began with an innocuous news item that said that a prominent politician from Tamil Nadu who had undergone an organ transplant in the US needed drugs worth Rs50,000 a year to keep him alive. The expenditure raised a storm in the Tamil Nadu assembly. Ramarao found it interesting enough to investigate what the particular drug was. It turned out to be a cyclosporin which is used as a post-operative drug. Following an organ transplant, the body normally tends to reject the new organ as the immune system is programmed to treat it as a foreign body and fight it. Cyclosporins suppress this immune system, thereby making the body co-exist with the new organ. But if the immune system as a whole is suppressed, the body becomes prone to attack by other serious infections. Thus, cyclosporin levels have to be closely monitored and the drug needs to be taken continuously.
A Japanese company introduced FK 506 as the next generation immunosuppressant which has a very high selectivity. In fact, without suppressing the immune system indiscriminately it makes the body accept the new organ. The drug has performed wonders. Recently, a patient at the Pittsburgh medical school needed a liver transplant but, as a human donor was not available and the patient was sure to die, the doctors transplanted a baboon's liver. They then treated him with FK-506; quite incredibly, the patient survived for 30 days!
FK-506 has 14 chiral centres in its structure. During chemical synthesis, one can go wrong at any of the 14 points. By contrast, thalidomide has only one chiral centre. That is why Ramarao and nCT, Hyderabad, created waves in the world of organic synthesis when they succeeded with FK-506. But, as Ramarao admits, "This is still basic research. We are far away from developing a commercially viable process for FK-506." However, BCT'S chiral technology for antihypertensive beta blockers, etc, has already been transferred to industry.
Chiral synthesis has three basic approaches. The first is resolving a racemic mixture of two crystals with different melting points by preferential crystallisation. The anti-typhoid chloramphenicol is separated thus. This is used widely in the industry but hardly 20 per cent of racemates appear in this form of mechanical mixture or 'conglomerates'. In many cases the enantiomers can be resolved by making the mixture react with a pure organic acid or a base of the right chirality. The racemates separate to form two diasteromeric salts, ie salts with two chiral centres where one chiral centre is identical but the other one is different. The popular anti- TB drug ethambutol, phenyl glycine and the cardiovascular drug diltiazem are separated this way. These methods of resolution are industrially very widely used.
The second method is called asymmetric synthesis. Here one makes use of the fact that most natural products such as amino acids, carbohydrates, etc, are chiral. They are used as starting materials and as molecular templates to synthesise the required chirally pure compound. Another popular method is to use chiral catalysts, called 'chemzymes' by Nobel Laureate E.J. Corey. A large number of drugs like Vitamin C, semi-synthetic penicillins, cephalosporins, timolol, propranolol, diltiazem, thienamycin, ampicillin, dopa, naproxen, etc, are manufactured this way, using asymmetric synthesis.
The third method which is also creating a lot of interest is enzymatic transformations. Enzymes are naturally occurring chiral catalysts and are highly selective. The stages in this method involve fermentation to produce the required enzyme, enzymatic transformation reaction, separation of the enzyme without losing its bio-catalytic activity, and separation and purification of the product. One has to find economically viable conversions at all stages. Enzymes can be used to separate racemic mixtures as well as for bioasymmetric synthesis.
Chiral technology will be important enough to attract funds for development in India too. Abbot Laboratories of the US, Lupin Laboratories and Cipla are funding research in this field at IICT. Ramarao is convinced that India, which has already shown its strength in organic synthesis both in academia and industry, can get into the big league in chiral technology if sufficient investment is made in the field now.
Sales of chirally pure drugs crossed $35 billion in 1993
Class of Drugs 1998 world wide Sales ($ billion)
Cardiovascular 11.3
Antibiotics 10.8
Hormones 4.5
Neurological 2.0
Anti-inflammatory 1.5
Anti-cancer 1.0
Others 4.5
Total 35.6
How L N Mittal built his steel empire
Business India, May 10-23, 2004
Sultan of Steel
Lakshmi Mittal’s juggernaut rolls round the world building the most globalised steel MNC
Shivanand Kanavi
Last week a handful in India received a gold-embossed envelope from Summer Palace, Bishops Avenue, London. If the recipients surmised that it carried a summons from the British royalty, they were not quite correct. It was from a modern-day empire-builder, Lakshmi Mittal, better known as LN in India.
After jetting around the world in his Gulfstream IV, acquiring steel mills and iron ore mines, rolling mills, and coke ovens in Algeria, South Africa, Romania, the Czech Republic, Poland, Serbia, Macedonia, and so on, is Mittal inviting people for a coronation of sorts? Is the latest acquisition of a £70-million house at Kensington, next to the royals, a sign?
Perish the thought. Nothing so megalomaniacal for this very down to-earth steel magnate. A doting father, he was sending pre-invites for his daughter’s wedding this summer.
If a number of wannabes are disappointed at not receiving the letter, his own exuberance is only constrained by the size of the venue in Paris.
Despite being a hardworking and bottomline-driven businessman to the core, the family is his soft spot. He has groomed his son Aditya, 28, as an intelligent partner in building the most globalised steel company in the world. His executives, many of whom are former S A I L engineers, swear by his quick decision-making, tight control, and the management style of a benevolent patriarch.
Steel analysts round the world are going gaga at his juggernaut that has rolled insatiably through the downturn and the upturn and grown from 19 million tonnes in capacity in 2001 to 43 Mt in early 2004. However, his style and value systems are not unusual for a first-generation entrepreneur building a family-owned business in India. His distinction is that he has chosen the tough world of global steel as his playground, totally focused on it, and single-mindedly acquired an enviable group of assets round the globe. He has knitted these disparate assets together into a global and unusually nimble organisation, a creature never seen before in a flabby industry that was essentially national and inherently inert.
He might appear with boring repetition, in all sorts of ‘rich lists’ produced by newspapers, but there are always sheikhs and sultans that have fancier jets, yachts, and palaces than Mittal. To British tabloid-readers tired of the shenanigans of David and Vicky Beckham, it might provide more grist to the mill. But sooner rather than later, LN will be studied by the more serious students of business for having created a new paradigm in the steel world.
This summer LN and young Aditya Mittal will have a well-deserved break. In the last four years since we featured them on the cover of Business India, the duo have increased steel production in their group to 42 million tonnes a tad less than Arcelor, the European giant that has arisen out of the merger of Aceralia, Usinor, and Arbed, which has a capacity of 44 million tonnes. Already market sources are pointing out that this quarter the L N M Group might have produced more steel than Arcelor. But the rate at which the M&A division headed by Aditya is carrying on due diligence and putting in bids, L N M might become the largest steelmaker sooner rather than later.
When LN first popped up on the radar screens of international journalists after the acquisition of Chicago based Inland Steel in 1998, he was called “Carnegie from Calcutta” by T h e Wall Street Journal. Today the LNM Group has grown to three times Andrew Carnegie’s legacy, 103-yearold US Steel. But the king is blasé about it. “Becoming the largest producer of steel in the world is not an end in itself. That can happen now or a year later, but the vision that we have put forward of a globalised steel industry is the more important thing,” says LN. “He has been opportunistic and acquired cheap assets from the public sector wherever they were put on sale— isn’t ‘vision’ too grand a word to describe it?” asks an observer who does not want to be quoted. But if you observe how LN functions and what he has been repeatedly saying at international steel forums, it becomes clear that there is a method in his global meanderings and acquisitions.
They all fit into a grand strategy, and now his rivals have also started acknowledging it. In May 2000, when LN spoke at the American Iron and Steel Institute of the need for consolidation and globalisation of the steel industry, the industry bigwigs listened carefully. In fact too carefully. A year later the slumbering US Steel ventured out of the US and acquired a steel plant in Slovakia in a closely contested bid with Mittal. Last year a new group, International Steel Group, emerged in the US, which acquired three bankrupt steel companies. And in December 2003, in a global steel conference in Paris, Arcelor CEO Guy Dolle spoke Mittal’s language of globalization and Mittal was quick to take a bow in his keynote address later in the afternoon.
“I have seen the steel industry for over 30 years. It has become increasingly clear to me that there is too much flab, there is too much fragmentation, and too little attention to lowering the cost of production. If other industries like auto and aluminium saw the virtues of consolidation and the virtues of globalisation, why not steel?” he asks. Four years ago, when he had a capacity of 19 Mt, Mittal told Business India that he considered 35–40 Mt as a decent size. However, now that he has reached that size, he has raised the bar further to 80–100 Mt. It does not take a genius to guess who might get there first! Malay Mukherjee, president and C O O of the group, who is himself becoming a legend in the industry as Mr Fixit, is confident that in Central and Eastern Europe alone the group will add another 10–15 Mt at existing sites in the next 3–4 years.
On 1 May LN and Aditya joined in the festivities in Warsaw on the accession of Poland and Czech Republic and eight other new states to the European Union by participating in the European Economic Forum. And they were smiling. After all, the LNM Group has emerged as the largest steelmaker in Central and Eastern Europe (CEE), and sees a big upside in these countries joining the EU. First of all, access to Western Europe becomes smooth. But that’s not all; with lower costs the region might become the manufacturing hub for Europe and one expects more investments from Brussels for upgrading roads and other infrastructure in the region. Thus there is going to be considerable demand growth within C E E, which L N M is best placed to supply. The auto industry, which requires high-end steel products, is also increasingly shifting to this region.
“I consider L N M’s acquisitions in CEE very positive. These countries are likely to grow fast economically, have a growing demand for steel (e.g. in construction), and have relatively low labour costs compared to Western Europe. EU accession will affect plants in Poland and the Czech Republic. Romania is expected to join in 2007. These plants are well located to supply both C E E as well as nearby Germany and Austria,” says Roger Manser, editor of Steel Business Briefing.
“The engineering skills in Czech Republic and Slovakia can be favourably compared with those in Germany,” says K.A.P. Singh, a former managing director of the Bhilai steel plant and now COO of Ispat Nova Hut and Ispat Polska Stal. Clearly Arcelor, ThyssenKrupp, and Corus, the European steel troika, will spend many sleepless nights now that L N M has outflanked them.
In a bid to use the geographic contiguity of Czech Republic and Poland to his advantage LN announced a common senior management team for the Czech plant and four other plants in Poland. “Together they have over 10 Mt of steelmaking, common iron ore sources in Ukraine, and are literally sitting on coalbeds with excellent coking ovens. With marginal investments the steelmaking can be increased by another 5 Mt,” says Frantisek Chowaniec, former C E O of Nova Hut, who has become a key member of Mittal’s team in Central Europe. “These plants are closer to each other than Bhilai and Bokaro. So their operational amalgamation was a given, but the key is to improve quality of products and move up the value chain,” says Mittal. So Malay Mukherjee, K.A.P. Singh, and Frantisek Chowaniec are using their 100 man-years of steelmaking expertise in executing LN’s strategy in weeks, rather than months.
Was becoming the largest player in C E E fortuitous or was it really part of a grand plan? “It was part of a grand plan and we have worked hard to execute it,” says Aditya Mittal, vice-chairman of the group. Aditya came fresh out of Wharton on 1997 and was thrown in at the deep end by LN to handle the I P O of Ispat International N V on N Y S E. “I took the company public. That was my first project. That helped me in many respects. I learnt a lot about the company, I met up with all the C E Os, etc, did a lot of due diligence. It also came to be known as my project, which got me a lot of publicity and respectability. It was a smashing success and was called the ‘equity deal of the year’, etc. It was a $400 million offering and we raised $727 million. Creating Ispat International was nontrivial too. We had to satisfy Mexican G A P, Canadian G A P, and so on. It was a multifaceted project. It was followed by discussions with Inland and a year later we acquired it,” says Aditya.
“It is wrong to say that Aditya has only seven years of experience in the business. What about those 21 years prior to that, when he had steel for breakfast and lunch with his father?” asks B.C. Agarwal, C F O of Ispat International, half in jest. Agarwal is a very low-key member of the core team that runs the company and goes back 30 years with LN, starting in the paddy fields of Indonesia.
Chicago-based Inland was the most ambitious acquisition of the group. The publicly listed company was an icon of the American steel industry with a customer list that read like the who’s who of Detroit’s auto industry. It was an integrated 5 Mt plant with its own iron ore and coal mines and a large R&D and product development centre with over 120 steel technologists. The $1.4 billion deal made Mittal a major player in the US market.
Mittal’s management has turned Inland lean and mean, saving $270 million in annual costs and increasing hot metal production by another million tonnes. Today, with a 6,500- strong workforce producing 6 Mt, Inland is one of the most efficient integrated steel companies in the US.
Ironically, Mittal’s magic seems to have hurt him in Inland. Other nearby companies like Bethlehem Steel and L T V went bankrupt and were acquired by I S G after reducing the liabilities through Chapter 11 proceedings, whereas Inland remained afloat through all this turbulence and still carries a large liability in terms of workers’ pensions and benefits, thereby dragging the group’s profitability down. Will bottomline-driven Mittal get rid of Inland? “That is totally hypothetical. Inland is one of the better companies in the US and there are many intangible benefits like access to high-end product technology and an enviable customer list, he retorts.
Be that as it may, after the initial high of acquiring Inland came the downturn in the world steel market caused by excess capacity and stagnation or recession in demand. In the meantime Mittal tried his hand at buying a steel company in a collapsing, post-Soviet Kazakhstan in 1995. He thereby took over a huge human resource liability. Karmet, the third largest steel plant in the erstwhile Soviet Union, had 30,000 workers, the coal mines had another 30,000. The company had to supply hot water and electricity to Temirtau town and run a 100-room hotel, a T V station, a newspaper, a summer camp for 1,400 children of employees, a hospital, and so on. But the 5 Mt plant itself was a shambles, producing less than a million tonnes, its 300M W power plant producing less than 90MW.
“We learnt a lot about hidden costs and surprises in such acquisitions,” says Mukherjee, who was dispatched to set up camp there and bring the plant back to life. It is said that a former high official in the Soviet government had set up a shell company as a marketing consultant to Karmet and had made a fortune through dubious practices. It took some time for Mittal to discover the minefield and eliminate the leakage. Today Karmet, headed by N.K. Chaudhary, a former Hindalco executive, is reported to be one of the most profitable parts of Mittal’s empire. However detailed financial figures for plants in Kazakhstan, Indonesia and the new acquisitions in Algeria, Romania, Czech Republic and Poland are not available to be compared with other companies as Mittal does not disclose them under the guise that they are privately held by his family.
By 2000, however, it was clear that the opportunities in former socialist countries of Eastern Europe, if properly utilised, would lead to a preeminent position in emerging Europe. One of the drivers for easy political acceptance of privatisation of steel and coal in Eastern Europe was the carrot of accession to EU. Chapter 15 of the EU accession document forbids governments from subsidising their steel and coal industries. If they could not raise finance from international financial institutions like I F C or the European Bank for Reconstruction and Development (E B R D), these companies would be forced to lay off with heavy political risks to the governing dispensations. So the governments found it better to privatise. However, they stipulated strict liability criteria, which prevented asset-stripping. The new owners could not transfer other debt onto the asset.
The father-and-son duo took the risk and cast their eyes eastward. “I became the head of M&A and with a small team I started looking at various government-owned steel mills up for privatisation. The first to come up was the steel plant in Slovakia. We put in a bid that was financially sound and expected to win it, but soon found that a good financial bid is not enough. One had to win over the unions, the old management, the government of the day, and so on,” says Aditya. What he does not say is that Bill Clinton, the then US president, used his considerable charm to persuade the Slovakian government of the day to award the plant to US Steel.
“Those were tough days. The industry was in the dumps and here I was so-called head of M&A, with a failed acquisition to show at the end of the year!” says Aditya. “I learnt the most lessons in business during those days. My father’s vision and style were definitely inspiring.” To overcome the angst of failure and a business cycle, Aditya took to skiing and long distance running. His creditable performance in the London Marathon a fortnight ago, where he ran “the whole nine yards” of 42 km despite a serious knee injury suffered in a skiing accident, showed that finally the frenetic sprinter has learnt the loneliness of a long-distance runner. Today, with several successful acquisitions under his belt, Aditya surprises many a visitor with his boyish charm.
“Aditya is startlingly assured. At a recent Metal Bulletin – World Steel Dynamics conference in Paris, his answers to a series of questions were clear, concise, and cogent. The audience was obviously impressed. When his father rose to address the delegates at lunch on the same day, he was asked how he intended to top his son’s performance that morning. “I don’t intend to try,” Mittal said with disarming modesty. “I intend to follow him. He is the future.” Mittal got a round of applause, Metal Bulletin edit or Bob Jones recalls.
“My most challenging period was 2001. Steel was dead, capital was scarce, we were doing three attempts at acquisition simultaneously. In fact we were doing circuits — Monday to Wednesday I was in Romania (the cabinet would meet on Thursday), Thursday and Friday in South Africa, and over the weekend in Algeria (since they are closed on Friday). And then Annabas in Algeria happened in June, Sidex in July, and Iscor in August. Altogether it was 14 Mt! That was the most challenging and rewarding period. I also got promoted to V C,” Aditya grins.
Perhaps the most recent acquisition, of four Polish steel companies rolled into one entity for the purpose of privatisation, has been the most difficult and rewarding of all. It has added 6 Mt to the Mittal stable andfinally made Mittal the most formidableforce in Europe. But it wasn’t easy. Here too the Mittals encountered US Steel and the persuasive powers of George W. Bush. In the midst of war in Iraq, Bush made a stopover at Warsaw and not only persuaded Poland to provide troops for peacekeeping in Iraq but also did his bit for US Steel. So certain were observers of another battle lost by Mittal after Slovakia when confronted by the White House, that The Independent of London carried a bylined story on 25 May 2003 with the title ‘Bush beats Mittal at his own game’. Leaving nothing to chance, the US ambassador to Warsaw met the Polish union leaders 11 times to help them make up their minds. But all the high-pressure lobbying eventually backfired. The Mittals won the bid.
They had learnt their lessons from Slovakia well. They assembled a nine member negotiating team which included Polish American executives from Inland; Chowaniec, the C E O of the Czech plant across the southern border to reassure the Poles that the Mittal weren’t destabilisers; union leaders from other plants to show that they deliver what they promise in terms of the social package; and so on. In the final analysis, the American artillery proved counterproductive. The Poles must have thought, “If this is the pressure before privatisation, what will we have to go through afterwards, if it is sold to the Americans?”
“Poland has taken us to new levels in the corporate world. The press, unions, and the government scrutinized our organisation extensively technical competence, corporate governance, people, and so on. We came out with flying colours. Today nobody can say that L N M is a secretive group that can only take over run-down companies. We had a better financial offer and a fine track record of turning companies around in more than nine places in different cultures and societies,” says Mukherjee proudly.
However, the acquisition in Romania led to a lot of controversy. Sections of the British press went hammer-and tongs at Mittal and Tony Blair. They claimed that Mittal’s donation of £125,000 to the Labour Party was a quid pro quo for a little help from Blair in pushing the Romanian government in favour of Mittal. “Finding an opportunity to take Blair’s squeaky clean image down a notch or two, the press went haywire. With a pinch (actually more like a handful) of bigotry against Asian businessmen, they tried to dig up all kinds of dirt against him,” says a P R consultant from London. Lakshmi Mittal himself learnt about the campaign at a party in Delhi, when a well informed Atal Behari Vajpayee commented, “Lakshmiji you seem to have shaken Blair up.”
But the dirt hit the fan soon after the friendly banter. The Mittals refused to comment on the affair and remained incommunicado to the press. After all, the donation to Labour was an open affair publicised on several Websites that track such things. The letter from Blair to the Romanian P M pushing Mittal’s case too was a routine one that all western governments do for their businessmen. But the British press found fault with Blair since they alleged that Mittal was an Indian and not British, and that though he runs his empire from London the companies themselves are incorporated in Holland, and so on.
“The whole thing was nonsense. Privatisation of Sidex was one of the most transparent processes. L N M was the only one left standing at the end of it and naturally won,” says Chris Beumann, senior advisor to E B R D, an international financial institution formed with contributions from 60 governments with the express mandate to help former Eastern European economies move towards privatization and market economies. The bank has funded over 100 privatisation projects in Eastern Europe deploying 3.5 billion. Mittal has nothing more to add than a cryptic “The whole thing makes me sad.”
Be that as it may, it is one thing to acquire a company but another to successfully turn it around. Here the engineering skills of Mukherjee and his team have played a major role.
Mukherjee, an IIT Kharagpur alumnus and former general manager at Bhilai, has become a globetrotter who has fixed problems with the direct reduced iron (D R I) plant in Mexico and the whole plant in Kazakhstan, getting out of the barter system that was bleeding Sidex in Romania, getting outdated twin-hearth furnaces in Algeria up and running, and so on.
“India has a huge resource of highly skilled and knowledgeable engineers, educated and badly paid in the public sector. The Mittals pick the best managers – even ones who might appear to be past retirement age – and pay them handsomely. But these managers have to perform and perform brilliantly in some of the world’s most unpleasant and dangerous environments,” says Jones of Metal Bulletin.
“The body of technical knowledge that exists in the group is to be found nowhere else in the world,” says director (continuous improvement) Bill Scotting, a former McKinsey & Co veteran. “Blast furnace relining, D R I, Corex, billet casting, ingots and slab casters, thin-slab casters, and a variety of rolling mills... The list is endless. A veritable school of steelmaking exists here,” says Scotting. “The strength of the group is that it not only uses its global operations to purchase raw materials at the lowest cost and sell the right mix of products at the highest value but also pools its knowledge to benchmark performance and to fix technical problems in any of the plants,” he adds.
When Business India visited Ispat Nova Hut in the Czech Republic, this factor was amply evident. The Steckel mill in the plant went down, disrupting production. The mill, built at a considerable expense of over $275 million by the Czech government, has been a continuous source of problems in an otherwise well-maintained plant. The American contractor went bankrupt in the middle of commissioning and caused untold delays and problems. Having had experience with a similar mill in its Quebec plant, LNM was able to get it up and working when it took over. On the day of this writer’s visit, an electronic card responsible for communication between two parts of the mill went kaput. It was diagnosed as due to problems in the embedded software. However, no vendor was available to fix it. The top management pooled their resources and had wires burning across the globe, restoring the mill to full functioning in 24 hours — a matter that could have taken weeks in any other company, waiting for an expert from the vendor.
In fact the turnaround and successful operation of every single acquisition has been a result of using such global expertise. The Algerian plant Annabas, for example, was built by the Russians, but also had considerable French technology. The blast furnace and sinter plant were French, while the steel melt shops were Russian. It was an isolated country. External help from vendors was not available because of riots and religious fanaticism, etc. A new plant that was commissioned in 1994 ran for two days before a problem arose and the people who built the plant did not come. The plant had 400 experts from Russia. But Ispat hands who had plenty of experience dealing with Russian experts in Bhilai and Bokaro dealt with the issues appropriately. They also used their own knowledge of Russian and Russia to source spare parts. Experts from plants in France and Quebec also arrived and unraveled the problems. It all helped. A plant that produced barely 700,000 tonnes now makes 100 per cent more.
Tying up appropriate raw material supplies will soon lead to another blast furnace becoming operational here. Today the government showcases it as a successful privatization and L N M has become the dominant player in the Maghreb region comprising Tunisia, Morocco, and Algeria, where considerable developmental activity is going on.
Then came Sidex. A huge plant where the shop floor knew how to run the plant but did not have any support from the management. It was driven by the Mafia. Everybody was taking away whatever he could. It was said that there were many millionaires in Galati, while the plant lost a million dollars a day on an average. So straightening out the commercial side was important. There were operational issues like tying up iron ore, coal, electricity, and gas as well. Narendra Chaudhary, another former Bhilai hand who had earlier managed the Kazakh plant, was transferred here. The local plant management was sent to other plants in the group to learn innovations in maintenance practices, etc. The plant had 27,000 people, 9,000 of whom accepted a VRS. The better lot in the old management were empowered, while corrupt ones were sacked. When the new marketing team from L N M itself caught the virus of corruption, the whole team was sacked.
Today the government talks to LNM first when any new thing comes up for privatisation. Of course there is still competitive bidding, but L N M’s credibility is very high. In fact the group bought four more downstream plants recently in Romania, thereby becoming a very strong player in steel tubes for the global oil and gas industry. On the other hand two plants, which had been privatised to a US and an Italian group, are now closed. But Sidex has seen its stock rise 350 per cent after privatisation. No wonder that E B R D officials like Chris Beumann don’t hesitate to sing paeans to Mittal. The success in Romania has had a snowballing effect and played a major role in the acquisition of the Czech and Polish plants. The local bishop in Galati, Romania, is also happy as Mittal respected his wishes and built a church for the community near the plant.
In South Africa, apartheid and international isolation had left a good plant behind international norms of efficiency. It was part of a coal mining company and was subsidised by the mines. So the government thought it would be better off by demerging the two and bring in a strategic investor for steel. L N M bought 30 per cent of the equity from the market and was offered stock in place of a consulting fee for every rise in profitability. As a result L N M today owns 49.9 per cent of the company and is waiting for the go-ahead from the Competition Commission to acquire a majority stake. The stock of the company has gone up from six rand to 37 rand, which in dollar terms is even more impressive, considering that the rand has appreciated by 100 per cent against the dollar in the interim. Besides increasing the shareholder value of the government’s remaining holding, Mittal has further endeared himself to the ruling A N C by appointing a black African as chairman of the company for the first time in its history.
Then came the Czech Nova Hut, which was a good plant but the management had miscalculated the returns on investments on the Steckel mill. The other source of problems was the outdated twin-hearth furnaces that exist only in Bhilai, outside of Nova Hut. This technology not only takes 5–6 times longer to make steel, but also needs constant expert supervision. Tuning the plant up and replacing the old barter system with international marketing has not only led to increased profitability of over ...80 per tonne within a year, but the stock of Nova Hut has also gone up 750 per cent.
While the Poland story has yet to unfold, Mittal is proud that he is restoring the glory of a plant in whose guest book Jawaharlal Nehru wrote on 25 June 1955, “This is a magnificent enterprise which deserves a much longer visit than I have been able to give it. I wish I could see it more thoroughly. And all this has grown up where there were fields four years ago. I congratulate those who built it.”
With raw material prices shooting up, everyone in the steel industry is realising the truth in Chanakya’s Arthashastra from the 4th century BC: “The treasury has its source in the mines; from the treasury the army comes into being. With the treasury and the army the earth is obtained with the treasury as its ornament.” (Chapter 2, Section 12). Situated in the midst of Magadh, an empire that Alexander made friends with due its prowess in iron technology, Chanakya very well understood the economics of the metal industry.
Mittal has focused on tying up raw materials by acquiring as many mines as possible. Last week he bought an iron ore mine in Serbia and now his teams are scouring Ukraine, Russia, and Iran for iron ore and Central Europe for coal. The other focus has been acquiring downstream mills as in Romania and Macedonia, while building a new one in China.
Last year the group had a profit of $2.2 billion on sales of $12 billion. Considering that the privately held part is virtually debt-free, that’s a lot of money. But this year, with higher sales and the acquisition in Poland, Mittal has forecast sales of $16 billion. Being the most integrated large steel company, profits too are expected to be higher. However it is to be noted that the public company Ispat International is trading at $11 (the issue price was $27) at a P / E multiple of 21(Tisco is trading at a P/E of 8.5).
“Today we have enough experts to run steel plants, so we are looking for talent elsewhere,” says Mittal. This year the IIMs in India saw the L N M Group visit their campuses for recruitment. “The CEO of our Mexican plant is from the chip industry. The one in Kazakhstan is from the aluminium industry. I am looking for cross-pollination now,” adds Mittal. With more and more experts acknowledging Mittal’s skills in running the first steel M N C, he shouldn’t have any problem attracting talent from the top business schools of the world.
While Asia and China in particular have led the bull-run in the steel industry, Mittal’s eyes are firmly on the EU as the emerging economic giant. And for that nobody is better prepared than he. “Central and Eastern Europe is definitely one of the best places to make steel in the long term. In fact, metallurgy seems to be vanishing as a science and art in the developed world. It would not be surprising if we keep it alive here by building a fine research institution right here,” says Mukherjee.
As for forays into his motherland, Mittal has so far confined himself to philanthropy in the form of building a hospital for earthquake victims in Bhuj and an IT institute in his home province of Rajasthan and a technology institute for women in Mumbai.But what about steel? “Whenever the Indian government is serious about privatising SAIL we are ready to participate,” he says.
“My theme at this time is how to make the steel industry sustainable. Actually it is very simple. The day every steel CEO sees making money as his objective the steel industry will become sustainable through downturns and upturns. We have been able to provide leadership in consolidation, globalisation, and low-cost production, and this is being recognised. Whether we become No. 1 or remain No. 2 is not important, but the leadership we are providing is. We have shown enough entrepreneurship now we have to build an institution,” says Mittal looking forward, which is of course easier said than done.
Commenting on the acquisition of a steel plant in Trinidad by Mittal, Business India wrote 16 years ago (14 November 1988): “A new Indian multinational is born, shall we say!” Last year the Confederation of Indian Industry had Building the Indian MNC as its theme. In a short period of time Lakshmi Mittal has provided to Indian businessmen one successful model of building an M N C and that too in an industry where none existed before. May he inspire a few more.
Sultan of Steel
Lakshmi Mittal’s juggernaut rolls round the world building the most globalised steel MNC
Shivanand Kanavi
Last week a handful in India received a gold-embossed envelope from Summer Palace, Bishops Avenue, London. If the recipients surmised that it carried a summons from the British royalty, they were not quite correct. It was from a modern-day empire-builder, Lakshmi Mittal, better known as LN in India.
After jetting around the world in his Gulfstream IV, acquiring steel mills and iron ore mines, rolling mills, and coke ovens in Algeria, South Africa, Romania, the Czech Republic, Poland, Serbia, Macedonia, and so on, is Mittal inviting people for a coronation of sorts? Is the latest acquisition of a £70-million house at Kensington, next to the royals, a sign?
Perish the thought. Nothing so megalomaniacal for this very down to-earth steel magnate. A doting father, he was sending pre-invites for his daughter’s wedding this summer.
If a number of wannabes are disappointed at not receiving the letter, his own exuberance is only constrained by the size of the venue in Paris.
Despite being a hardworking and bottomline-driven businessman to the core, the family is his soft spot. He has groomed his son Aditya, 28, as an intelligent partner in building the most globalised steel company in the world. His executives, many of whom are former S A I L engineers, swear by his quick decision-making, tight control, and the management style of a benevolent patriarch.
Steel analysts round the world are going gaga at his juggernaut that has rolled insatiably through the downturn and the upturn and grown from 19 million tonnes in capacity in 2001 to 43 Mt in early 2004. However, his style and value systems are not unusual for a first-generation entrepreneur building a family-owned business in India. His distinction is that he has chosen the tough world of global steel as his playground, totally focused on it, and single-mindedly acquired an enviable group of assets round the globe. He has knitted these disparate assets together into a global and unusually nimble organisation, a creature never seen before in a flabby industry that was essentially national and inherently inert.
He might appear with boring repetition, in all sorts of ‘rich lists’ produced by newspapers, but there are always sheikhs and sultans that have fancier jets, yachts, and palaces than Mittal. To British tabloid-readers tired of the shenanigans of David and Vicky Beckham, it might provide more grist to the mill. But sooner rather than later, LN will be studied by the more serious students of business for having created a new paradigm in the steel world.
This summer LN and young Aditya Mittal will have a well-deserved break. In the last four years since we featured them on the cover of Business India, the duo have increased steel production in their group to 42 million tonnes a tad less than Arcelor, the European giant that has arisen out of the merger of Aceralia, Usinor, and Arbed, which has a capacity of 44 million tonnes. Already market sources are pointing out that this quarter the L N M Group might have produced more steel than Arcelor. But the rate at which the M&A division headed by Aditya is carrying on due diligence and putting in bids, L N M might become the largest steelmaker sooner rather than later.
When LN first popped up on the radar screens of international journalists after the acquisition of Chicago based Inland Steel in 1998, he was called “Carnegie from Calcutta” by T h e Wall Street Journal. Today the LNM Group has grown to three times Andrew Carnegie’s legacy, 103-yearold US Steel. But the king is blasé about it. “Becoming the largest producer of steel in the world is not an end in itself. That can happen now or a year later, but the vision that we have put forward of a globalised steel industry is the more important thing,” says LN. “He has been opportunistic and acquired cheap assets from the public sector wherever they were put on sale— isn’t ‘vision’ too grand a word to describe it?” asks an observer who does not want to be quoted. But if you observe how LN functions and what he has been repeatedly saying at international steel forums, it becomes clear that there is a method in his global meanderings and acquisitions.
They all fit into a grand strategy, and now his rivals have also started acknowledging it. In May 2000, when LN spoke at the American Iron and Steel Institute of the need for consolidation and globalisation of the steel industry, the industry bigwigs listened carefully. In fact too carefully. A year later the slumbering US Steel ventured out of the US and acquired a steel plant in Slovakia in a closely contested bid with Mittal. Last year a new group, International Steel Group, emerged in the US, which acquired three bankrupt steel companies. And in December 2003, in a global steel conference in Paris, Arcelor CEO Guy Dolle spoke Mittal’s language of globalization and Mittal was quick to take a bow in his keynote address later in the afternoon.
“I have seen the steel industry for over 30 years. It has become increasingly clear to me that there is too much flab, there is too much fragmentation, and too little attention to lowering the cost of production. If other industries like auto and aluminium saw the virtues of consolidation and the virtues of globalisation, why not steel?” he asks. Four years ago, when he had a capacity of 19 Mt, Mittal told Business India that he considered 35–40 Mt as a decent size. However, now that he has reached that size, he has raised the bar further to 80–100 Mt. It does not take a genius to guess who might get there first! Malay Mukherjee, president and C O O of the group, who is himself becoming a legend in the industry as Mr Fixit, is confident that in Central and Eastern Europe alone the group will add another 10–15 Mt at existing sites in the next 3–4 years.
On 1 May LN and Aditya joined in the festivities in Warsaw on the accession of Poland and Czech Republic and eight other new states to the European Union by participating in the European Economic Forum. And they were smiling. After all, the LNM Group has emerged as the largest steelmaker in Central and Eastern Europe (CEE), and sees a big upside in these countries joining the EU. First of all, access to Western Europe becomes smooth. But that’s not all; with lower costs the region might become the manufacturing hub for Europe and one expects more investments from Brussels for upgrading roads and other infrastructure in the region. Thus there is going to be considerable demand growth within C E E, which L N M is best placed to supply. The auto industry, which requires high-end steel products, is also increasingly shifting to this region.
“I consider L N M’s acquisitions in CEE very positive. These countries are likely to grow fast economically, have a growing demand for steel (e.g. in construction), and have relatively low labour costs compared to Western Europe. EU accession will affect plants in Poland and the Czech Republic. Romania is expected to join in 2007. These plants are well located to supply both C E E as well as nearby Germany and Austria,” says Roger Manser, editor of Steel Business Briefing.
“The engineering skills in Czech Republic and Slovakia can be favourably compared with those in Germany,” says K.A.P. Singh, a former managing director of the Bhilai steel plant and now COO of Ispat Nova Hut and Ispat Polska Stal. Clearly Arcelor, ThyssenKrupp, and Corus, the European steel troika, will spend many sleepless nights now that L N M has outflanked them.
In a bid to use the geographic contiguity of Czech Republic and Poland to his advantage LN announced a common senior management team for the Czech plant and four other plants in Poland. “Together they have over 10 Mt of steelmaking, common iron ore sources in Ukraine, and are literally sitting on coalbeds with excellent coking ovens. With marginal investments the steelmaking can be increased by another 5 Mt,” says Frantisek Chowaniec, former C E O of Nova Hut, who has become a key member of Mittal’s team in Central Europe. “These plants are closer to each other than Bhilai and Bokaro. So their operational amalgamation was a given, but the key is to improve quality of products and move up the value chain,” says Mittal. So Malay Mukherjee, K.A.P. Singh, and Frantisek Chowaniec are using their 100 man-years of steelmaking expertise in executing LN’s strategy in weeks, rather than months.
Was becoming the largest player in C E E fortuitous or was it really part of a grand plan? “It was part of a grand plan and we have worked hard to execute it,” says Aditya Mittal, vice-chairman of the group. Aditya came fresh out of Wharton on 1997 and was thrown in at the deep end by LN to handle the I P O of Ispat International N V on N Y S E. “I took the company public. That was my first project. That helped me in many respects. I learnt a lot about the company, I met up with all the C E Os, etc, did a lot of due diligence. It also came to be known as my project, which got me a lot of publicity and respectability. It was a smashing success and was called the ‘equity deal of the year’, etc. It was a $400 million offering and we raised $727 million. Creating Ispat International was nontrivial too. We had to satisfy Mexican G A P, Canadian G A P, and so on. It was a multifaceted project. It was followed by discussions with Inland and a year later we acquired it,” says Aditya.
“It is wrong to say that Aditya has only seven years of experience in the business. What about those 21 years prior to that, when he had steel for breakfast and lunch with his father?” asks B.C. Agarwal, C F O of Ispat International, half in jest. Agarwal is a very low-key member of the core team that runs the company and goes back 30 years with LN, starting in the paddy fields of Indonesia.
Chicago-based Inland was the most ambitious acquisition of the group. The publicly listed company was an icon of the American steel industry with a customer list that read like the who’s who of Detroit’s auto industry. It was an integrated 5 Mt plant with its own iron ore and coal mines and a large R&D and product development centre with over 120 steel technologists. The $1.4 billion deal made Mittal a major player in the US market.
Mittal’s management has turned Inland lean and mean, saving $270 million in annual costs and increasing hot metal production by another million tonnes. Today, with a 6,500- strong workforce producing 6 Mt, Inland is one of the most efficient integrated steel companies in the US.
Ironically, Mittal’s magic seems to have hurt him in Inland. Other nearby companies like Bethlehem Steel and L T V went bankrupt and were acquired by I S G after reducing the liabilities through Chapter 11 proceedings, whereas Inland remained afloat through all this turbulence and still carries a large liability in terms of workers’ pensions and benefits, thereby dragging the group’s profitability down. Will bottomline-driven Mittal get rid of Inland? “That is totally hypothetical. Inland is one of the better companies in the US and there are many intangible benefits like access to high-end product technology and an enviable customer list, he retorts.
Be that as it may, after the initial high of acquiring Inland came the downturn in the world steel market caused by excess capacity and stagnation or recession in demand. In the meantime Mittal tried his hand at buying a steel company in a collapsing, post-Soviet Kazakhstan in 1995. He thereby took over a huge human resource liability. Karmet, the third largest steel plant in the erstwhile Soviet Union, had 30,000 workers, the coal mines had another 30,000. The company had to supply hot water and electricity to Temirtau town and run a 100-room hotel, a T V station, a newspaper, a summer camp for 1,400 children of employees, a hospital, and so on. But the 5 Mt plant itself was a shambles, producing less than a million tonnes, its 300M W power plant producing less than 90MW.
“We learnt a lot about hidden costs and surprises in such acquisitions,” says Mukherjee, who was dispatched to set up camp there and bring the plant back to life. It is said that a former high official in the Soviet government had set up a shell company as a marketing consultant to Karmet and had made a fortune through dubious practices. It took some time for Mittal to discover the minefield and eliminate the leakage. Today Karmet, headed by N.K. Chaudhary, a former Hindalco executive, is reported to be one of the most profitable parts of Mittal’s empire. However detailed financial figures for plants in Kazakhstan, Indonesia and the new acquisitions in Algeria, Romania, Czech Republic and Poland are not available to be compared with other companies as Mittal does not disclose them under the guise that they are privately held by his family.
By 2000, however, it was clear that the opportunities in former socialist countries of Eastern Europe, if properly utilised, would lead to a preeminent position in emerging Europe. One of the drivers for easy political acceptance of privatisation of steel and coal in Eastern Europe was the carrot of accession to EU. Chapter 15 of the EU accession document forbids governments from subsidising their steel and coal industries. If they could not raise finance from international financial institutions like I F C or the European Bank for Reconstruction and Development (E B R D), these companies would be forced to lay off with heavy political risks to the governing dispensations. So the governments found it better to privatise. However, they stipulated strict liability criteria, which prevented asset-stripping. The new owners could not transfer other debt onto the asset.
The father-and-son duo took the risk and cast their eyes eastward. “I became the head of M&A and with a small team I started looking at various government-owned steel mills up for privatisation. The first to come up was the steel plant in Slovakia. We put in a bid that was financially sound and expected to win it, but soon found that a good financial bid is not enough. One had to win over the unions, the old management, the government of the day, and so on,” says Aditya. What he does not say is that Bill Clinton, the then US president, used his considerable charm to persuade the Slovakian government of the day to award the plant to US Steel.
“Those were tough days. The industry was in the dumps and here I was so-called head of M&A, with a failed acquisition to show at the end of the year!” says Aditya. “I learnt the most lessons in business during those days. My father’s vision and style were definitely inspiring.” To overcome the angst of failure and a business cycle, Aditya took to skiing and long distance running. His creditable performance in the London Marathon a fortnight ago, where he ran “the whole nine yards” of 42 km despite a serious knee injury suffered in a skiing accident, showed that finally the frenetic sprinter has learnt the loneliness of a long-distance runner. Today, with several successful acquisitions under his belt, Aditya surprises many a visitor with his boyish charm.
“Aditya is startlingly assured. At a recent Metal Bulletin – World Steel Dynamics conference in Paris, his answers to a series of questions were clear, concise, and cogent. The audience was obviously impressed. When his father rose to address the delegates at lunch on the same day, he was asked how he intended to top his son’s performance that morning. “I don’t intend to try,” Mittal said with disarming modesty. “I intend to follow him. He is the future.” Mittal got a round of applause, Metal Bulletin edit or Bob Jones recalls.
“My most challenging period was 2001. Steel was dead, capital was scarce, we were doing three attempts at acquisition simultaneously. In fact we were doing circuits — Monday to Wednesday I was in Romania (the cabinet would meet on Thursday), Thursday and Friday in South Africa, and over the weekend in Algeria (since they are closed on Friday). And then Annabas in Algeria happened in June, Sidex in July, and Iscor in August. Altogether it was 14 Mt! That was the most challenging and rewarding period. I also got promoted to V C,” Aditya grins.
Perhaps the most recent acquisition, of four Polish steel companies rolled into one entity for the purpose of privatisation, has been the most difficult and rewarding of all. It has added 6 Mt to the Mittal stable andfinally made Mittal the most formidableforce in Europe. But it wasn’t easy. Here too the Mittals encountered US Steel and the persuasive powers of George W. Bush. In the midst of war in Iraq, Bush made a stopover at Warsaw and not only persuaded Poland to provide troops for peacekeeping in Iraq but also did his bit for US Steel. So certain were observers of another battle lost by Mittal after Slovakia when confronted by the White House, that The Independent of London carried a bylined story on 25 May 2003 with the title ‘Bush beats Mittal at his own game’. Leaving nothing to chance, the US ambassador to Warsaw met the Polish union leaders 11 times to help them make up their minds. But all the high-pressure lobbying eventually backfired. The Mittals won the bid.
They had learnt their lessons from Slovakia well. They assembled a nine member negotiating team which included Polish American executives from Inland; Chowaniec, the C E O of the Czech plant across the southern border to reassure the Poles that the Mittal weren’t destabilisers; union leaders from other plants to show that they deliver what they promise in terms of the social package; and so on. In the final analysis, the American artillery proved counterproductive. The Poles must have thought, “If this is the pressure before privatisation, what will we have to go through afterwards, if it is sold to the Americans?”
“Poland has taken us to new levels in the corporate world. The press, unions, and the government scrutinized our organisation extensively technical competence, corporate governance, people, and so on. We came out with flying colours. Today nobody can say that L N M is a secretive group that can only take over run-down companies. We had a better financial offer and a fine track record of turning companies around in more than nine places in different cultures and societies,” says Mukherjee proudly.
However, the acquisition in Romania led to a lot of controversy. Sections of the British press went hammer-and tongs at Mittal and Tony Blair. They claimed that Mittal’s donation of £125,000 to the Labour Party was a quid pro quo for a little help from Blair in pushing the Romanian government in favour of Mittal. “Finding an opportunity to take Blair’s squeaky clean image down a notch or two, the press went haywire. With a pinch (actually more like a handful) of bigotry against Asian businessmen, they tried to dig up all kinds of dirt against him,” says a P R consultant from London. Lakshmi Mittal himself learnt about the campaign at a party in Delhi, when a well informed Atal Behari Vajpayee commented, “Lakshmiji you seem to have shaken Blair up.”
But the dirt hit the fan soon after the friendly banter. The Mittals refused to comment on the affair and remained incommunicado to the press. After all, the donation to Labour was an open affair publicised on several Websites that track such things. The letter from Blair to the Romanian P M pushing Mittal’s case too was a routine one that all western governments do for their businessmen. But the British press found fault with Blair since they alleged that Mittal was an Indian and not British, and that though he runs his empire from London the companies themselves are incorporated in Holland, and so on.
“The whole thing was nonsense. Privatisation of Sidex was one of the most transparent processes. L N M was the only one left standing at the end of it and naturally won,” says Chris Beumann, senior advisor to E B R D, an international financial institution formed with contributions from 60 governments with the express mandate to help former Eastern European economies move towards privatization and market economies. The bank has funded over 100 privatisation projects in Eastern Europe deploying 3.5 billion. Mittal has nothing more to add than a cryptic “The whole thing makes me sad.”
Be that as it may, it is one thing to acquire a company but another to successfully turn it around. Here the engineering skills of Mukherjee and his team have played a major role.
Mukherjee, an IIT Kharagpur alumnus and former general manager at Bhilai, has become a globetrotter who has fixed problems with the direct reduced iron (D R I) plant in Mexico and the whole plant in Kazakhstan, getting out of the barter system that was bleeding Sidex in Romania, getting outdated twin-hearth furnaces in Algeria up and running, and so on.
“India has a huge resource of highly skilled and knowledgeable engineers, educated and badly paid in the public sector. The Mittals pick the best managers – even ones who might appear to be past retirement age – and pay them handsomely. But these managers have to perform and perform brilliantly in some of the world’s most unpleasant and dangerous environments,” says Jones of Metal Bulletin.
“The body of technical knowledge that exists in the group is to be found nowhere else in the world,” says director (continuous improvement) Bill Scotting, a former McKinsey & Co veteran. “Blast furnace relining, D R I, Corex, billet casting, ingots and slab casters, thin-slab casters, and a variety of rolling mills... The list is endless. A veritable school of steelmaking exists here,” says Scotting. “The strength of the group is that it not only uses its global operations to purchase raw materials at the lowest cost and sell the right mix of products at the highest value but also pools its knowledge to benchmark performance and to fix technical problems in any of the plants,” he adds.
When Business India visited Ispat Nova Hut in the Czech Republic, this factor was amply evident. The Steckel mill in the plant went down, disrupting production. The mill, built at a considerable expense of over $275 million by the Czech government, has been a continuous source of problems in an otherwise well-maintained plant. The American contractor went bankrupt in the middle of commissioning and caused untold delays and problems. Having had experience with a similar mill in its Quebec plant, LNM was able to get it up and working when it took over. On the day of this writer’s visit, an electronic card responsible for communication between two parts of the mill went kaput. It was diagnosed as due to problems in the embedded software. However, no vendor was available to fix it. The top management pooled their resources and had wires burning across the globe, restoring the mill to full functioning in 24 hours — a matter that could have taken weeks in any other company, waiting for an expert from the vendor.
In fact the turnaround and successful operation of every single acquisition has been a result of using such global expertise. The Algerian plant Annabas, for example, was built by the Russians, but also had considerable French technology. The blast furnace and sinter plant were French, while the steel melt shops were Russian. It was an isolated country. External help from vendors was not available because of riots and religious fanaticism, etc. A new plant that was commissioned in 1994 ran for two days before a problem arose and the people who built the plant did not come. The plant had 400 experts from Russia. But Ispat hands who had plenty of experience dealing with Russian experts in Bhilai and Bokaro dealt with the issues appropriately. They also used their own knowledge of Russian and Russia to source spare parts. Experts from plants in France and Quebec also arrived and unraveled the problems. It all helped. A plant that produced barely 700,000 tonnes now makes 100 per cent more.
Tying up appropriate raw material supplies will soon lead to another blast furnace becoming operational here. Today the government showcases it as a successful privatization and L N M has become the dominant player in the Maghreb region comprising Tunisia, Morocco, and Algeria, where considerable developmental activity is going on.
Then came Sidex. A huge plant where the shop floor knew how to run the plant but did not have any support from the management. It was driven by the Mafia. Everybody was taking away whatever he could. It was said that there were many millionaires in Galati, while the plant lost a million dollars a day on an average. So straightening out the commercial side was important. There were operational issues like tying up iron ore, coal, electricity, and gas as well. Narendra Chaudhary, another former Bhilai hand who had earlier managed the Kazakh plant, was transferred here. The local plant management was sent to other plants in the group to learn innovations in maintenance practices, etc. The plant had 27,000 people, 9,000 of whom accepted a VRS. The better lot in the old management were empowered, while corrupt ones were sacked. When the new marketing team from L N M itself caught the virus of corruption, the whole team was sacked.
Today the government talks to LNM first when any new thing comes up for privatisation. Of course there is still competitive bidding, but L N M’s credibility is very high. In fact the group bought four more downstream plants recently in Romania, thereby becoming a very strong player in steel tubes for the global oil and gas industry. On the other hand two plants, which had been privatised to a US and an Italian group, are now closed. But Sidex has seen its stock rise 350 per cent after privatisation. No wonder that E B R D officials like Chris Beumann don’t hesitate to sing paeans to Mittal. The success in Romania has had a snowballing effect and played a major role in the acquisition of the Czech and Polish plants. The local bishop in Galati, Romania, is also happy as Mittal respected his wishes and built a church for the community near the plant.
In South Africa, apartheid and international isolation had left a good plant behind international norms of efficiency. It was part of a coal mining company and was subsidised by the mines. So the government thought it would be better off by demerging the two and bring in a strategic investor for steel. L N M bought 30 per cent of the equity from the market and was offered stock in place of a consulting fee for every rise in profitability. As a result L N M today owns 49.9 per cent of the company and is waiting for the go-ahead from the Competition Commission to acquire a majority stake. The stock of the company has gone up from six rand to 37 rand, which in dollar terms is even more impressive, considering that the rand has appreciated by 100 per cent against the dollar in the interim. Besides increasing the shareholder value of the government’s remaining holding, Mittal has further endeared himself to the ruling A N C by appointing a black African as chairman of the company for the first time in its history.
Then came the Czech Nova Hut, which was a good plant but the management had miscalculated the returns on investments on the Steckel mill. The other source of problems was the outdated twin-hearth furnaces that exist only in Bhilai, outside of Nova Hut. This technology not only takes 5–6 times longer to make steel, but also needs constant expert supervision. Tuning the plant up and replacing the old barter system with international marketing has not only led to increased profitability of over ...80 per tonne within a year, but the stock of Nova Hut has also gone up 750 per cent.
While the Poland story has yet to unfold, Mittal is proud that he is restoring the glory of a plant in whose guest book Jawaharlal Nehru wrote on 25 June 1955, “This is a magnificent enterprise which deserves a much longer visit than I have been able to give it. I wish I could see it more thoroughly. And all this has grown up where there were fields four years ago. I congratulate those who built it.”
With raw material prices shooting up, everyone in the steel industry is realising the truth in Chanakya’s Arthashastra from the 4th century BC: “The treasury has its source in the mines; from the treasury the army comes into being. With the treasury and the army the earth is obtained with the treasury as its ornament.” (Chapter 2, Section 12). Situated in the midst of Magadh, an empire that Alexander made friends with due its prowess in iron technology, Chanakya very well understood the economics of the metal industry.
Mittal has focused on tying up raw materials by acquiring as many mines as possible. Last week he bought an iron ore mine in Serbia and now his teams are scouring Ukraine, Russia, and Iran for iron ore and Central Europe for coal. The other focus has been acquiring downstream mills as in Romania and Macedonia, while building a new one in China.
Last year the group had a profit of $2.2 billion on sales of $12 billion. Considering that the privately held part is virtually debt-free, that’s a lot of money. But this year, with higher sales and the acquisition in Poland, Mittal has forecast sales of $16 billion. Being the most integrated large steel company, profits too are expected to be higher. However it is to be noted that the public company Ispat International is trading at $11 (the issue price was $27) at a P / E multiple of 21(Tisco is trading at a P/E of 8.5).
“Today we have enough experts to run steel plants, so we are looking for talent elsewhere,” says Mittal. This year the IIMs in India saw the L N M Group visit their campuses for recruitment. “The CEO of our Mexican plant is from the chip industry. The one in Kazakhstan is from the aluminium industry. I am looking for cross-pollination now,” adds Mittal. With more and more experts acknowledging Mittal’s skills in running the first steel M N C, he shouldn’t have any problem attracting talent from the top business schools of the world.
While Asia and China in particular have led the bull-run in the steel industry, Mittal’s eyes are firmly on the EU as the emerging economic giant. And for that nobody is better prepared than he. “Central and Eastern Europe is definitely one of the best places to make steel in the long term. In fact, metallurgy seems to be vanishing as a science and art in the developed world. It would not be surprising if we keep it alive here by building a fine research institution right here,” says Mukherjee.
As for forays into his motherland, Mittal has so far confined himself to philanthropy in the form of building a hospital for earthquake victims in Bhuj and an IT institute in his home province of Rajasthan and a technology institute for women in Mumbai.But what about steel? “Whenever the Indian government is serious about privatising SAIL we are ready to participate,” he says.
“My theme at this time is how to make the steel industry sustainable. Actually it is very simple. The day every steel CEO sees making money as his objective the steel industry will become sustainable through downturns and upturns. We have been able to provide leadership in consolidation, globalisation, and low-cost production, and this is being recognised. Whether we become No. 1 or remain No. 2 is not important, but the leadership we are providing is. We have shown enough entrepreneurship now we have to build an institution,” says Mittal looking forward, which is of course easier said than done.
Commenting on the acquisition of a steel plant in Trinidad by Mittal, Business India wrote 16 years ago (14 November 1988): “A new Indian multinational is born, shall we say!” Last year the Confederation of Indian Industry had Building the Indian MNC as its theme. In a short period of time Lakshmi Mittal has provided to Indian businessmen one successful model of building an M N C and that too in an industry where none existed before. May he inspire a few more.
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